First-time Fund Managers DO BETTER

There are not millions, not billions, but trillions of dollars that needs to be managed by good asset managers. All right, what's up guys? Today we're gonna talk about some of the unique advantages that emerging managers have when you're starting a fund. I've worked with thousands of emerging managers over the years, and a lot of you guys think that you're coming at this from a disadvantage, right? Because you're starting out, you're less qualified or less able, and that's totally false. As emerging managers, you actually have a lot of benefits going for you as emerging managers. And then there's just a lot of positive trends and momentum in the industry that are in favor of emerging managers. So today we're gonna break it down. Let's start by defining an emerging manager. Like, what even is that? Well, it's pretty simple. It's somebody that can take money and make money. If you have an investment strategy where you can take capital, effectively deploy that, generate a return, guess what? You've got the makings for a fund. Most emerging managers raise less than $1 billion on their first fund. That might sound like a lot of money. Steve Schwarzman raised $1 billion on his first fund, but typically you don't have the networks to support any larger of the raise. Not saying you can't, it's just not common. Some of you have the networks to support a couple hundred million dollar raise, but the majority of you are going to raise what we call micro funds, which is sub $50 million. And there's really nothing wrong with that. There's a lot of advantages, which Which we'll get into in a second. The last thing is if you have Roman numerals I, II, III, or IV by your name, you're an emerging manager. All the way up to your 4th fund, a lot of allocators still deem you as an emerging manager. And guess what? They love it. You actually have a lot of advantages of being a first-time fund manager. Investors like it for a lot of reasons, which we'll break down now. The first reason is that you guys are entrepreneurs. Investors love working with entrepreneurs. You're more motivated, you're more passionate, and there's just more at stake for you guys. Allocators love working with you for that reason. Secondly, you guys are coming right out of industry experience. So whether you're an underwriter or an agent or an operator, you're working in the field, right? You have boots on the ground. A lot of seasoned fund managers are analyzing the industry from afar. You know, they're working in their spreadsheets, but you guys are operators. You can identify gaps in the marketplace oftentimes better than those, you know, sitting behind a computer screen. And that's really good because we like gaps as investors because gaps lead to value add. Value add leads to additional return that you're generating for them as investors. And then lastly, you guys just do better. First-time fund managers are 50% more likely to achieve an IRR of 25% or higher. Do you guys realize that? That statistically you just do better as emerging fund managers? Isn't that awesome? And that comes for a variety of reasons, the first of which is that you have a better alignment of interests, right? These larger funds, they're managing hundreds of millions, billions of dollars, and they can have a bad year. And sit back and, you know, still make hundreds of thousands, if not millions of dollars a year, just from their management fees alone. And as emerging managers, you're typically managing less money. So you're really motivated by that carry. The management fee, sure, it'll cover the bills and pay expenses, but you really make the most money on the performance fee. So again, you have a better alignment of interests. Another point is that you guys are managing just one product. I was just on the phone the other day with a fund manager and he was managing 21 different funds. That's cool, right? Guess what? Guess what? His focus is split 21 different ways. He's managing 21 different products. As an emerging manager, you're managing just one, and you can then be a better steward of investor capital, and your focus can go all in on one thing. So be sure to bring these points up as you're going out and raising money or working on your first fund, and remind LPs of the benefits of allocating to emerging managers. So before we go any further, I wanna just break down what we call the capital raising matrix. So I wanna show you guys this graph, uh, which we've gone through before, and I'll quickly go through it again. But you really need to understand where you're playing ball as emerging managers. So on the left-hand side, we've got your different types of investors, and on the bottom, we've got your fund size. So starting at the bottom and working our way up, non-accrediteds typically have a net worth of less than a million. Typically, guys, they're just really not worth your time. Small investors are a headache. They are going to be oftentimes more work, more management than your larger allocators. But it's totally up to you. Above that, you've got your high net Worths, which have net worths north of $1 million. And you've got very high net worths, which have net worths north of $5 million. And then above that, you've got what we call the ultra-high net worths, which have net worths over $30 million. Don't ask me who named it, but they're brilliant, right? And then above that, you've got your different types of capital allocators like your fund of funds or your family offices or your multifamily offices. And then lastly, the largest allocators are your institutional-sized investors. So if you're starting your first fund, you're probably going to raise primarily from high net worths and very high net worths. Just starting out, what we call the three Fs: friends, family, and fools. As you grow your fund, you grow your assets under management. It's good to have a diversified LP mix of investors. I don't know if you guys realize this, but KKR, one of the largest private equity firms in the world, 15% of their investors come from the from individual investors, the retail-sized investors. So basically ultra high net worths and below. So it's it's always good to have a diverse group because as you're going to raise money, there's something that we call momentum capital, which basically Basically means that each dollar you raise gets easier and easier. If you have a good family office in your network and you're just starting off, I wouldn't go straight to the family office. I would go knock down a couple hundred thousand or a few million from friends and family and fools, and then you've got traction, you've got momentum. You've basically gotten other people to give their vote of approval, their stamp of approval on your offering, and it gives other investors confidence as they are trying to decide whether or not to invest with you in the opportunity. Before we get into that though, let's just talk about the number of millionaires that are coming into the marketplace. We often see the wealth gap talked about in the news, and I'm not being political here in any way, shape, or form, but they often talk about the decreasing or dissolving middle class, and you've got more rich people and more poor people. There's more millionaires out there that need their money managed by good asset managers. So to talk a little bit about portfolio theory and the— and how these investors deploy their money, the traditional portfolio says, well, 60% of your money should go to And 40% to bonds. And no, this is not financial advice in any way, shape, or form. I'm just talking about what industry standard is. You know, a lot of experts are saying that that model is dead and that the new model is what they call a 50/30/20, where 50% goes to stocks, 30% should go to bonds, and 20% should go to alternatives. And that's where you come in as emerging fund managers. You know, if we take a step back and look at the size of these markets, it's pretty compelling. The institutional market size is, and this is a study done by Bain last year is between $135 to $145 trillion. That's a lot of money. If you guys were willing to guess if the retail market was larger or smaller than that, where do you think it'd be? Well, it surprised me. It's literally almost exactly the same size coming in at between $140 to $145 trillion. Now guess what? Only 4% of those dollars are currently allocated into alternatives of the retail market. A lot of experts project that that number will be closer to 20% within the next decade or two, as soon as more people become educated and learn about the advantages of alternative investments in a portfolio. And guys, that's a delta of $22 trillion. That is a lot of money that needs to be managed. So over this wave, there's— you're just— you're at a great time right now. The rise of the retail investors where more people have more money, And they're looking for asset managers to manage that for you. And they need exposure to alternatives. And a lot of the time it's harder to get into these big firms, these big asset managers. They have high minimum commitments of tens of millions of dollars sometimes. But as an emerging manager, you guys have smaller commitments and you're okay taking on $100K checks here and there or $250K checks here and there. Why? Because you're just starting out and you're— and it's okay to take that money. So there is just a lot Acting in your favor. The last point I want to make that's playing to the benefit of the emerging manager is that while a lot of industries are consolidating, you know the asset management field is not. The number of new firms coming onto the marketplace is is surprising. This is a graph from PitchBook that came out last fall of the number of new micro funds launched, right? It's growing exponentially. Why? Because LPs understand that there's a lot of benefits that smaller emerging asset managers play. You guys just do better when we look at the. Statistics, but summarize this up: investors need good asset managers to manage their money. There are not millions, not billions, but trillions of dollars that needs to be managed by good asset managers. Guys, again, I've worked with thousands of you. Lean into these strengths. Lean into the fact that you only have one product. Lean into the fact that you have better access. Lean into the fact that you have a better alignment of interests, and ultimately. Remind them that emerging managers tend to do better statistically. So you guys, you've got a lot going for you. I'm confident in the new wave of emerging managers coming onto the market, and I'm excited for what you guys are able to accomplish. If you're just starting out and you're trying to figure things out from a mindset, go check out my other video where I walk through the 4 psychological stages of emerging managers, because I think it builds off this topic well. We'll talk to you guys soon.