Picking which private markets’ managers to invest with

Written by Dan Feder | March 21, 2022

Dan Feder walks through the importance, and process of picking private fund managers

Key Takeaways

Dan Feder of the University of Michigans Endowment fund discusses how he looks for managers to be excellent at at least one of the following parts of the investment process: sourcing, transacting/structuring, operating, adding value and exiting.
Manager dispersion is very high in private markets, so picking good managers is critical to achieving high returns.
Deep information networks are critical to finding and assessing managers. Often, marginal differences can be the defining factor that separates manager performance.
Excellent execution of one of the above can unlock a lot of value for investments and investors.

Transcript

My name is Dan Feder, and I lead private equity and venture capital investing for the University of Michigan's endowment pool.

I believe that the key to doing well in private markets is to be consistent over time. And that investing with the very best partners in the very best funds and the very best opportunities consistently over time, whether those are good vintages or bad vintages, will certainly outstrip the timing of when you go in or out.

Endowments and family offices generally have pretty small offices. They don't have huge staffs, but they also have, in most cases or many cases, really great information networks. And that is an advantage or can be a big advantage in investing in private markets. The game of picking is very, very hard. And anywhere but it's very, very hard. And private equity venture and private markets, broadly speaking, all of the opportunities look good, almost all of them.

But the dispersion of returns is huge. So why is that? It's because there are things at the margin that make a big difference. And so what we focus on is getting ourselves to the right people through information networks that allow us to discern within that population of thousands where we should start looking and then where we really spend our time and attention is trying to figure out what are those things at the margin that make a big difference.

So when we look at opportunities, we're evaluating opportunities. We have a very simple framework that we employ, and it really is five things. And so there are five things that I believe all managers have to do would have to do well. Those five things are sourcing investment opportunities, transacting them well, owning their investments well, during a holding period, exiting well, and then running their firms.

So the first four of those are opportunities to create value for an investment. The fifth one is important, but it is, it is more of an opportunity, if not done well, to destroy value. And in the private markets, the two areas that figure most prominently in value add are sourcing and owning. So are there differentiated ways that an investor sources investment opportunities, how does he or she get to them under what terms? And then the other most prominent or most visible way that value add is put into the system just by owning investments well - being a good partner to management teams with private equity-owned firms, being a good partner and facilitator of value add to founders and management teams of venture-backed companies, and so forth. So when we look at opportunities, we're really looking at through that basic framework. These are the five things. How does a manager do along all those dimensions? And then, within those five, are there one or two that are especially compelling, and are they compelling in ways that are additive to the portfolio?

So we don't want to create a portfolio of a bunch of things that are all doing the same thing. We would like to have a portfolio of very few relationships that are doing things that are complementary to one another or that are different from one another. And that, by definition, would give us some diversity as well.

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