What LPs look for in first-time managers

Jay DeSantis comments: I've spun up multiple successful funds or have gotten approached to join very successful funds. As a first-time manager, I wish my past self could have access to a panel like the one Carta put forth. It gives you great candid insight and helps you articulate the vision from the Lp’s point of view. Great read. I highly recommend this article. Words worth holding for first-time managers.


Institutional investors are increasingly interested in partnering with emerging managers and investing in first-time funds.

But what exactly is an “emerging” manager, and how do institutional LPs evaluate funds? In a panel from the 2021 Carta Equity Summit, Kanyi Maqubela of Kindred Venture asked those questions. Three institutional LPs—Lara Banks of Makena Capital Management, Charmel Maynard, of the University of Miami, and Sara Zulkosky of Recast Capital—shared what they’re looking for.


Everybody, thank you so much for joining our panel for the Carta Equity Summit. I’m Kanyi Maqubela from Kindred Ventures, and I’m very pleased to be joined by three esteemed guests who are limited partners, institutional investors, brilliant minds, and very kind people in their own rights. Their bios are intimidating to me, so I’m honored to be among them. We’re hoping to keep this session casual and hopefully informative. So if and when you have questions, please, please, please, please drop them in the chat and we’ll make sure we leave some time at the end to address whatever comes up. Nothing is off limits, so please feel free to ask whatever’s burning. But let me just do a very, very quick round of intros, and then I’ll jump right into questions.


First is Charmel Maynard. Charmel is over at University of Miami, where he’s treasurer and chief investment officer. We also have Sara Zulkosky. Sara is co-founder and managing director at Recast Capital. And we have Lara Banks, a managing director at Makena Capital.


 

What's behind the rise of first-time fund managers?

Sara Zulkosky: I think a confluence of things, certainly.


One, there were lots of gaps to be filled, frankly. The market is shifting and founders are looking for help very early in their journey. And they’re looking for that deep industry expertise to help build their businesses from day one—rockstar operator angels that can bring that level of expertise to the table early on are a wonderful fit for that, right? It would be natural for them to start managing outside capital to do so. Also—just different networks, different approaches. There’s room in the market for folks to be tackling this space differently.


I think another driver is that it’s easier than ever, operationally, to start a fund. We have AngelList rolling funds and other models that—if you do get the fund up and running—make running the back end extremely easy. But getting to that point, of course, is the hard part: raising the fund.


Finally, you’re seeing some established investors at the mid and senior level leave their current roles. It may be because they’re looking for increased autonomy or improved economics. Or in some cases, we’re seeing folks stepping away because they didn’t feel valued or respected in their prior roles, and would rather start their own firm, build their own culture, and hang out their own shingle.


Defining a first-time fund manager.

Kanyi: This question is off script, but you bring up an interesting point. Hearing all three of your answers about the definition of a first-time manager and an emerging manager, it sounds like it helps to have already been at a fund. And it helps to already have done fund stuff before you’re starting. But I have to imagine that there’s tons and tons of people in this new class of investors who just haven’t done fund stuff. So how do you identify, first of all, their ability to do fund stuff? Do you need to see them doing it a little bit before you get comfortable? What is the fund stuff that you’re looking for in the first place?


And then the second question—and I’m sure you’re seeing this at scale—is a bunch of new partnerships. And so I could be a spinout from a fund and Lara could be a spinout from another fund. And who’s to say that’s going to work? How do you think about evaluating—even if it’s a spinout and it’s got all the sort of characteristics of safety that you’re looking for—how do you make sure that stuff works?


Sara: I’m happy to address the first part. We very intentionally look for managers who aren’t necessarily just spinning out of funds. We think that there’s really interesting opportunities coming from the operator space, or those coming from adjacent to the venture investment bubble specifically.I think there’s different things you need to look at in that case. I think if they’re early in their journey—so, an early fund iteration—are they coachable in the sense that we can step in, given our institutional LP backgrounds, and provide support? And will they listen to that support? And are they receptive to us helping them as they think about building their firm?


There’s stuff that I think your LPs can be very helpful with. But at the end of the day, it comes down to your ability to pick and support amazing companies. And the best way to figure that out is to do your references, to get to know that person as an individual, how they interact in the broader community—not only with their co-investors, but specifically with entrepreneurs. Are they a net positive to the space? I mean, you’re spending the bulk of your time answering that question, and this is true even for a spinout, or two folks coming from different funds coming together. That question is still at the forefront, regardless of whether you’re spinning out from an existing firm, in my opinion.


Charmel: Just to piggyback on Sara: I agree with everything she said—just to add a couple points: Running a fund—It’s difficult, right? We want to make sure that they’re spending their time on what we’re hiring them to do, which is to find great investments—not worrying about fund valuations and audits and payroll and all the things that come with starting the fund.


And so, for us, when we’re diligencing, it’s really: “Do you have the foundation and the back office?” We use that term, “back office”—and that can mean a lot of different things—to ensure that this person is spending their time on meeting founders, thinking about fund economics, thinking about the fund models, and actually going out there and executing. Because that’s one of the arguments that you hear about solo GPs. I’m not saying that’s correct, but a lot of times it’s, “Is this too much for them to shoulder by themselves?” Either you have a strong number two, or you’re outsourcing. What gives us, the LP, comfort that they’re not going to be bogged down with the day-to-day things?


So, I would just add that on: Sometimes it’s helpful to have someone who may have come from a fund background—because they would’ve seen that stuff, right? They would’ve seen how you put together an AGM, how you put together a quarterly letter, and what the steps of those things are—that can take a lot of time. And that matters to LPs, in terms of keeping up with how the fund is performing.


Lara: One thing I would add to that is just that we look for a little bit of humility around those points. To Sara’s point, asking us, “What should we do? What do you need?” Not over-engineering things for LPs, too. And to Charmel’s point, it’s outsourcing as much as you can, especially if you are a solo GP. It’s knowing what matters, which is, to Sara’s point, finding and connecting with the right entrepreneurs and being able to back them. And then, to Charmel’s point, thinking about portfolio construction, depending on your strategy. Those are the two core things you should be spending your time on. The rest, as much as you can—give that to others who have more experience. We are looking for people’s willingness to understand where their expertise is, where their time should be spent, and where they should be outsourcing to others.


And then, to your second question, in some ways the partnership dynamic can be harder. It’s actually almost a harder underwrite for us. It can be a more stable and longer-lived potential investment in some ways, too. So, there might be more payout to us and to the organization, but it’s an area where we spend a lot of time in understanding if they have not worked together, then how will that dynamic evolve? We do take on the risk, but I’d say almost every time we put one of those types of managers in the portfolio, that’s the first risk: How does that evolve? And what we’ve seen in the data, historically, is that teams that have worked together in the past do better. Ideally there would be some connectivity outside of one or two deals and some longer-term track record together. But that’s not to say it never works. It’s just that we’ve seen that the longevity of a team working together in the past, in some context, is predictive of future results.


We want to thank Carta for putting out this panel for first-time managers. And wanted to share this article for educational purposes.


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