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Emerging managers can sometimes generate the best returns, meaning it can be a bet worth considering.
Key Takeaways
- Emerging managers often outperform even top established managers if you're able to choose the very best. They've discovered a niche and are hungry and that alignment can drive excellent returns.
- They also tend to run smaller funds, making it easier for them to run niche strategies and generate high returns, whereas when you're a massive fund your opportunity set is more limited.
- Selecting the best emerging managers - people with a true edge - can lead to very high returns.
Transcript
I'm Joe Lonsdale. I'm an entrepreneur and investor. I founded several companies, including Palantir, Addapar, Open Gov, Affinity, Resilience Bio. A lot of really great teams. I'm proud of building a lot of companies, and I've become an investor over the last decade as well. Working with a lot of people who built my companies with me and others. And I run a firm called 8VC. We manage about $5 billion a committed capital, backing the best entrepreneurs figuring out what's newly possible in the world. We talk a lot about how there's high autocorrelation, so the best investors are going to keep doing well. And so when that means you should just keep backing the best investors in venture capital or in distressed areas or in private equity, why don't you just choose the best ones versus doing emerging? Emerging sounds really risky. And it actually turns out the data is that emerging managers tend to have their very highest returns for the very best ones. And so the question is if you can determine who's really good as they're emerging, that becomes a much better place to invest. This is kind of similar to how you think about venture capital, where the very highest returns on the early companies are very hard to determine if they're good. But if you happen to know that they're good, that's actually the area you're going to do best in. And so, you know, if you actually look at it, you look at emerging managers who, for some reason, have an advantage. So, for example, in venture capital, if they've built multiple successful companies, if they've been a partner as an investor at a top fund, and they have a good track record, if there's something about their background that suggests very strong, they're likely to be good. And if they're attracting the right people around them, then emerging managers tend to be the very best bet. They're also a great thing to bet on because you can get access early on. And if you think about it, emerging managers almost never have super, supergiant funds. They tend to have much smaller funds. And, of course, much smaller funds, when managed very well, have very high returns.
The problem with the very best investors is over time; they tend to raise more and more money. So you can be the best venture capital investor in the world, but if you're managing an eight or $9 billion fund like one of Sequoia's late-stage funds, it's probably still a good bet because they're Sequoia. They're probably not going to outperform a top emerging manager managing $100 million in venture capital just because you can only return $9 billion so many times versus 100 million. So I definitely think that top allocators focus a lot on emerging managers, and it's a smart thing to do.
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