Our job, and the job of any private markets allocator, is to find the managers or markets that we think will deliver attractive returns relative to public market comps and peers within a defined mandate. As we set out to define our “buy box” we couldn’t help but notice how the market oversimplifies the investable universe into Emerging vs. Established Managers. It was the Emerging Manager concept that initially caught our attention.

The case for Emerging Managers looks appealing, and has been the subject of many recent headlines. The out performance, on average, along with diversity initiatives, has led some institutional LPs to create Emerging Manager programs with the goal of capturing the potential outperformance of this category while adding portfolio diversification. We feel there hasn’t been adequate discussion of why certain Emerging Managers are more attractive — or how to distinguish among the many that meet the definition. Consider the below public pension plan definition, for example:

The plan typically defines emerging managers as those with:

• Assets Under Management

• Firms that manage less than $3 billion

• Target Fund Size (private markets)

• Preference for funds less than $1 billion

• Generation (private markets)

• Fourth generation or earlier institutional funds

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The industry has effectively come up with arbitrary size and vintage year qualifications. But how successful have these Emerging Managers been, really? How much risk do they represent? How new are they? Understandably, such questions have led certain groups of investors to associate “emerging” with “risky”.

What we at Epic Funds set out to do was identify the qualitative characteristics that we believe may lead to out performance, and back these managers regardless of vintage year or fund size qualifications. Internally, we call these managers Rising Managers. Characteristics we look for include strong incentive alignment, domain expertise, less competition to drive down returns, new or sub-institutional scale asset classes, and limited business risk.

Basically, we think “Emerging Managers” has become a muddied articulation of a category of investment opportunities. Some Emerging Managers are more successful and represent less risk than others. Some are much more successful and represent much less risk. Our job is to distinguish among them. To do this, we went beyond the existing definitions to ask ourselves “Is this the right team? The right time? The right fund size?” Or put differently, “Is there manager/market fit?”

These are some of the questions we answer when we evaluate a potential manager for the Epic Funds platform. At the top of the cohort are those who may be relatively new but are of an institutional quality, have high business savviness, and prioritize returns over scale. They are our Rising Managers. They represent a happy medium. A very happy medium. We believe they are the managers who make the news by outperforming their competitors — big or small.

The takeaway is this: There’s a cohort of managers that share the characteristics that make Emerging Managers attractive yet don’t present the business risk that’s often associated with a first-time fund or smaller manager. These managers might be in their fourth, fifth, or sixth fund but still fly under the radar of most investors and don’t fit neatly in the Emerging Manager definition. We believe partnering with these managers, our “Rising Managers,” is the key to unlocking the best opportunities within niche and capacity-constrained segments of private markets.

We’ll continue to be excited about the interest in Emerging Managers and support efforts to bring more people into the industry. Our focus, however, will be on a subset of the cohort, the ones we believe can deliver the best results for our LPs.
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