Alternative investments FinTech Dynamo Software released the results of a new survey, Trends, Challenges, & Insights from Leading Emerging Managers. The findings come on the heels of two additional pieces of Dynamo-led primary research, an October 2022 survey of Limited Partners (LPs) and asset allocators and a February 2023 survey of General Partners (GPs).
Throughout March 2023, Dynamo surveyed leaders across the global Emerging Manager marketplace. Participants represented a diverse set of funds, including private equity, venture capital, hedge funds, corporate development, real estate, fixed income, small-cap public equity, and private credit.
“The Emerging Managers we surveyed have a clear vision for moving quickly from scrappy upstarts to industry titans,” said Dynamo Software CEO Hank Boughner. “Despite the market’s ebbs and flows, they are aggressively pursuing healthy returns and hunting for both unicorns and camels.”
The research, contextualized in the Dynamo Frontline Insight Report, uncovered several noteworthy investment, talent and technology strategies being deployed by leading Emerging Managers today.
Top Talent Priority for Growth
To be successful in a tough economic climate, Emerging Managers are prioritizing the acquisition of top talent. Survey participants named “increased internal headcount” as the top area of investment to drive fundraising efforts over the next 12 months.
Like their larger GP counterparts, Emerging Managers do not seem likely to source fee revenue for additional dollars to pay top talent. The same percentage (88%) of GPs Dynamo polled in February and Emerging Managers polled in March indicated their fee structure would remain the same over the next 12 months.
Rather, cost reduction appears to be the go-to-strategy. “Creating efficiencies and optimizing workflows,” “overall cost” and “empowering the whole team to leverage tech” topped the list of reasons Emerging Managers are implementing technology. Operationally, “removing manual data tasks and introducing automated workflows” ranked as the top priority.
Following “increased internal headcount,” two other key areas for investment were “third-party data providers” and “technology platforms.”
“It was validating to learn that Emerging Managers see value in FinTech and data partners,” said Boughner. “It’s what drives our team to iterate continuously and rapidly, as there are new types and sources of data available each day. In close consultation with our clients, we identify and integrate that data rapidly. Perhaps as importantly, we invest in development that facilitates the smoother flow of data throughout the Emerging Manager’s tech stack, which is getting higher by the minute.”
Given the prioritization of data and FinTech, it’s no surprise that Emerging Managers indicated they will not pull back on their tech budgets. In fact, more than half (51%) expect tech budgets to increase over the next 12 months. Another 48 percent said their budgets would stay the same.
The three solutions that received the most votes for future inclusion in the Emerging Manager tech stack were “fundraising and marketing” solutions (No. 1 most popular), “deal management and CRM” (No. 2) and “investor relations” solutions.
Weighing Investors’ ESG Focus
With Deutsche Bank, Bloomberg, and PWC all similarly projecting ESG assets to exceed $100 trillion in five years, more than four out of 10 (43%) Emerging Managers surveyed by Dynamo expect investors will increase ESG and DEI reporting expectations over the next 12 months.
This may be due to the type of investor Emerging Managers are finding success with, beyond the go-to institutional investors. Over the last 12 months, a significant number of Emerging Managers raised the most capital from the private wealth segment, with 32 percent raising the most from high-net-worth individuals and 21 percent raising the most from family offices.
“Institutional investors will continue to be a core category of investment in Emerging Managers, but as more disclosure requirements come about and the barriers to obtaining data gets lower, private investors will receive more benchmarks and be empowered to ask more questions,” explained Danielle Pepin, Dynamo’s Head of Product, Portfolio Monitoring and Valuation. “Although the layers of fiduciary duty and external accountability are fewer for private wealth, progress against targets still needs to be reported, and these targets increasingly include non-financial metrics. Family offices, especially, are eager for data to demonstrate the success of their ESG- and DEI-focused investments.”
Still, investors trusting Emerging Managers with their money are exercising caution when it comes to early opportunities. Just 13 percent of those investors are willing to allocate more than 75 percent of their capital to new investment vehicles. About six in 10 investors (58%) will allocate no more than 25% of their capital to new vehicles.