Thursday, October 8, 2015

Trends for Early-Stage Investing in Emerging Managers

Irwin Latner, a member of Hedge Connection’s Boardroom and a Partner at Pepper Hamilton LLP, contributed the following thought piece.

The current environment for early-stage investing with emerging managers reflects an increasing number and variety of early-stage investments firms, an increasing pool of talented emerging managers, and a growing number and variety of investment structures and terms.
This article was published as a guest post on Hedge Connection on July 24, 2015. It is reprinted here with permission. It was also reprinted on Opalesque on August 17, 2015.

Ten years ago, “seeders” were few in number. Emerging hedge fund managers had few structural options and a limited group of institutional seeding firms to approach and with whom to negotiate. In the current market, however, surveys indicate that there is an increasing pool of talented emerging managers and an increasing number of new firms entering the early-stage investing arena, including funds of funds, dedicated seeding vehicles, endowments, foreign financial firms, family offices and even high-net-worth individuals.1 Indeed, recent data indicates that, for the first time in years, capital flows to smaller funds are starting to exceed those to larger funds.2 Though early-stage investing often refers to investing within the first six months after a fund’s launch, many early-stage investors are willing to invest on day one, which is typically referred to as “seeding.”

So we are clear, we are speaking of seed investment in the private fund that the emerging manager will manage, and not working capital seed investment in the manager itself. In that regard, all of the fiduciary and securities law protections associated with the management of “third party” money attach to the seed investments.

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