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The Emerging Manager Playbook For Navigating The Private Markets

Navigating the private markets as an emerging manager can be daunting. In this article, we attempt to demystify investing in the private markets and outline options for starting and scaling your investment business.

What You’ll Read

  • Raising Capital In The Private Markets
  • Why Emerging Managers Benefit from SPVs
  • The Path From SPVs To Raising A Fund
  • Why Emerging Managers Are Crucial To The Private Market Ecosystem

Key Takeaways

  • Investing in the private markets as a first-time (or ‘emerging’) manager can be daunting.
  • Emerging managers typically have two options for raising investor capital in the private markets: Funds and SPVs.
  • SPVs provide many benefits to emerging managers while establishing their track record and building investor relationships.
  • Zest makes it easy for emerging managers to digitize their SPV setup process and manage their administrative tasks. 

Background

Investing in the private markets as a first-time (we’ll refer to as ‘emerging’) manager can be daunting. 

Managers are responsible for finding the right opportunity, building investor relationships, and raising capital, all while maintaining the tedious work of collecting documentation, coordinating investor KYC, and many more administrative tasks.

Below, we’ll dive into how emerging managers operate their investment businesses, different options for structuring a capital raise, the role that emerging managers have in the MENA ecosystem, and more. 

But before we discuss the “how”, let’s begin with the “why” 👇

Introduction

The MENA region has seen an increase in investment activity in the private markets over the years with a growing number of venture capital and private equity fund managers actively allocating funds in new private market investment opportunities. 

There is much more room for growth as the private market ecosystem continues to mature in the MENA region and new emerging managers enter the market. This is especially true in the current period, where investor appetite is increasingly focused on MENA. 

That being said, however, factors like information asymmetry, uncertainty surrounding liquidity, and lack of price discovery mechanisms make building a solid thesis and raising capital from investors challenging. A fund manager’s track record and access play a significant role in bringing that trust. 

We’re here to demystify raising capital in the private markets and outline some common options for starting and scaling your investment business.

Raising Capital In The Private Markets

Emerging managers have various pathways for raising capital from investors in the private markets. The two most common approaches are:

  1. Managers can raise a fund that groups investor capital into a single entity and is invested across many different investment opportunities at the fund manager's discretion. 
  2. Managers can raise capital through Special Purpose Vehicles (SPVs) which groups investor checks into a single entity that’s invested in a singular investment opportunity.

Raising Capital Through A Fund

Emerging managers can raise capital through a fund, which allows them to group investor capital into a legal vehicle (fund structure) and invest that capital across a variety of investment opportunities within a pre-agreed investment strategy. 

When raising a fund, emerging managers approach their network and raise capital from prospective investors based on their investment strategy. Their strategy will typically address the stage of the companies they’ll invest in, the sector that the companies operate in, as well as the fund’s target investment size, number of investments, and more. 

Investors then have to make an investment decision based on the fund manager’s investment thesis and how confident they are that the fund manager can select the right set of companies at reasonable valuations, achieve successful exists and generate strong returns for their investors. 

Raising a fund can take as long as 12-24 months in order for the manager to reach their target fund size, which then will lead to the fund manager calling the first tranche of committed capital and beginning the fund’s investment period. Private market funds often have a lifespan of ten years, which means all investment positions must be distributed either in cash distributions or shares in-kind.  

A fund vehicle can sometimes have a complex legal structure and will need to account for supporting entities, for example, a management company and a general partner entity. These additional administrative requirements are important and protect investors, and therefore need to be included in the cost/pricing structure of running a fund. 

Raising Capital Through An SPV

On the other hand, emerging managers can raise capital from investors through SPVs, which allows the manager to group investor capital for a singular investment opportunity (aka, transacting on a deal-by-deal basis). 

When raising capital through SPVs, the manager has already identified the investment opportunity and presents it together with the investment terms to prospective investors. 

Managers who raise capital using SPVs are therefore approaching investors to raise capital for the investment opportunity at hand, and investors make their investment decisions based on the opportunity rather than committing capital based on an investment strategy.

SPVs are legal vehicles used for singular investment opportunities. The lifespan of an SPV varies based on the investment opportunity, but generally follows a similar liquidity profile as a fund, often with a lifespan of 7-10 years.

However, unlike a fund, an SPV’s success in generating an attractive return on investor capital is directly tied to the performance of the single underlying portfolio company and becomes dissolved upon a liquidity event of that company.

Why Emerging Managers Benefit from SPVs

Emerging managers often face headwinds when beginning their investing careers in the private markets. Among the hurdles that emerging managers looking to raise capital for their first fund face are establishing a track record of performance and building trusted relationships with their investors.

Building trust with investors and proving their ability to identify and secure allocation in great investment opportunities is paramount for managers to be able to raise a fund. After all, when a manager raises capital through a fund, they’re convincing investors to trust their investment thesis, and their ability to access great opportunities and generate meaningful returns. 

This is where SPVs come in as one of the potential pathways. 

Emerging managers often use SPVs to build their track record of investing in the private markets. Additionally, SPVs offer managers the opportunity to develop their relationships with their investors and prove their abilities to effectively communicate during the fundraising and post-investment period of each investment opportunity. 

Along with developing investor relationships, managers use SPVs as an opportunity to prove their value to portfolio companies and show entrepreneurs why they’d want to have the emerging manager as an investor on their cap table. This improves a manager's odds of securing high-quality deal flow in future opportunities.

Lastly, the costs of setting up an SPV can be much lower than the costs of starting a fund. This allows fund managers to move quickly to start raising capital for an investment opportunity without worrying about expensive overhead and lengthy timelines. 

The Path From SPVs To Raising A Fund

Throughout the course of raising capital with SPVs, emerging managers have the opportunity to develop a track record of managing investor capital, create a community of investors around their investment business, and show entrepreneurs why they belong on the cap table of the best companies. 

These characteristics are crucial to improving a manager’s odds of success if they decide to raise a fund. Once a manager has developed investor trust and an investing track record, they’re able to showcase their investing history and selection process. 

Why Emerging Managers Are Crucial To The Private Market Ecosystem

SPVs offer the most seamless and efficient way for emerging managers to begin transacting in the private markets. 

The MENA region has been buzzing with activity across the private markets, both from existing funds as well as the emergence of new managers raising and deploying capital into investment opportunities. 

The increase in capital being raised and deployed leads to an increase in the number of entrepreneurs starting companies. This is a flywheel that continues to benefit each party as investors and entrepreneurs build the private market ecosystem in the MENA region. 

How Zest Can Help

Zest makes it easy for emerging managers to digitize their SPV setup process and manage their administrative tasks.

Zest is digitizing private market transactions, building tools to streamline how entrepreneurs, funds, and investors transact. Our platform is designed to save you time and reduce administrative costs, simplifying the end-to-end investment process.

Disclaimer: this is an informative post, and should not be considered in any way or form as legal advice or recommendation to use funds or SPVs.

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