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Revisiting Headwinds: A Path Forward for Emerging Managers


Revisiting Headwinds: A Path Forward for Emerging Managers

In a 2020 article published in Emerging Manager Monthly, we explored how consultant consolidation was creating significant challenges for emerging managers. Today, we revisit this issue to assess what has changed and offer updated strategies to navigate this evolving landscape. The challenges remain daunting, but they have also opened new avenues for innovation and adaptation.

 

Consultant Consolidation: Persistent and Evolving Roadblocks

In the investment management business, the end of a calendar year often signals time for reassessment and planning. For our firm, with almost 30 years in the third-party marketing industry, it’s an opportunity to field inquiries from money managers evaluating their sales, marketing, and distribution efforts. However, these conversations have evolved, reflecting ongoing systemic changes to the ways allocators invest and how equity managers position themselves to raise capital. Particularly for actively managed strategies, the trends we observed in 2020—and their implications for emerging managers—remain deeply relevant today.

Upon reassessment, we have identified three persistent barriers emerging from consolidation:

 

Roadblock #1: Mergers Delay Manager Search Activity

The consolidation within the consulting industry continues to slow the manager search process. Mergers often result in extended integration phases, with research teams concentrating on reviewing existing portfolios, reducing the number of covered managers, and optimizing their processes. This leaves emerging managers—often single-strategy firms—struggling to remain relevant and gain visibility competing against firms with substantial multi-product relationships. Acquisitions require senior people to focus internally on integration if they want the process to succeed, making it fundamentally harder for emerging managers to get a hearing until the integration is complete.

Technological advances and efficient access to data have eased the early-stage evaluation process, as virtual meetings now allow for broader reach. However, these tools also heighten competition by enabling consultants to evaluate a greater number of managers without significantly expanding their search bandwidth. Emerging managers must work harder to prioritize differentiating themselves through compelling narratives and data-driven value propositions.

 

A Path Forward for Emerging Managers:

·         Leverage Virtual Engagement: Develop a blend of evergreen and dynamic materials to keep investors informed and engaged throughout extended evaluation periods.

·         Tailored Outreach Campaigns: Emphasize tailored value propositions aligned with investor goals through personalized outreach.

·         Invest in Content Automation: Utilize automated tools to monitor email engagement, streamline follow-ups, and uphold compliance standards.

·         Diversify Communications: Leverage platforms such as consultant portals, industry databases, websites, and LinkedIn to enhance traditional email strategies.

 

Roadblock #2: Continued Growing Bias Toward Multi-Strategy Firms

The preference of larger consulting firms leans heavily toward multi-strategy managers, whose broad capabilities are attractive when looking to streamline and simplify their business models. While logical from a resource allocation perspective, this trend places single-strategy or niche managers at a disadvantage. Smaller managers must have a compelling, differentiated reason for inclusion.

Notably, high active share, concentrated, thematic/impact investing, and special situation funds are emerging as areas where smaller, specialized managers can gain traction. By offering expertise in specific sub-segments of the capital structure or sectors with high growth potential, such as technology or healthcare, emerging managers can align themselves with consultants’ and institutional investors’ evolving needs. These focused approaches allow managers to stand out in an increasingly crowded marketplace.

 

A Path Forward for Emerging Managers:

·         Differentiate Through Specialization: Capitalize on opportunities within your investment niche by offering concentrated, thematic, sector-specific, or alternative vehicles tailored to client needs.

·         Storytelling with Impact: Craft impactful narratives that highlight innovation, specialized expertise, and measurable results.

·         Know Your Client: Tailor communications to specific client parameters, including investment preferences, ESG integration, AUM thresholds, and vehicle requirements.

 

 

Roadblock #3: More Competition for a Shrinking Pie

Institutional investors have consistently scaled back investments in actively managed equity strategies, favoring cost-effective passive solutions, ETFs, and in-house management. Additionally, the rise of alternative strategies, including private credit, cryptocurrency, and real assets, has further constrained the pool of available allocations and planned search activity.

Since 2020, some new trends have emerged. The rapid growth of model delivery portfolios as a preferred investment vehicle has revolutionized distribution opportunities. These portfolios streamline implementation and offer scalable solutions, making them attractive to both consultants and wealth advisor platforms. These wealth platforms represent a growing and influential segment of the investment landscape, blending elements of institutional and ultra-high-net-worth investing.

Adding to the complexity, the lines between consultants, family offices, OCIO, and RIA platforms have blurred significantly. It also requires managers to consider offering more vehicles (mutual funds, ETFs, UCITS, commingled funds, model delivery) that appeal to broader investor needs. Creating and servicing these expanded vehicles can be daunting, but it is essential for maintaining relevance.

 

A Path Forward for Emerging Managers:

·         Embrace Model Delivery Portfolios: Develop expertise in scalable, efficient investment vehicles that resonate with institutional and ultra-high-net-worth investors

·         Expand Vehicle Offerings: Design versatile fund structures to address diverse allocator preferences while ensuring cost efficiency.

·         Streamline Communication with Allocators: Implement a structured, consistent strategy to deliver fund updates, performance metrics, and thought leadership content.

·         Compliance Friendly Transparency: Address compliance proactively by utilizing pre-approved templates for regular communications.

 

Adapting to Thrive

The key insights are undeniable: the institutional sales cycle has become protracted, competition fiercer, and the challenges facing emerging managers increasingly demanding. But this is not a time for nostalgia or lamenting the past. Instead, it is an opportunity to adapt to new realities, refine your approach, and position yourself as an indispensable partner in an ever-changing investment landscape.

Emerging managers must act with urgency, embracing innovation, and stay attuned to the evolving needs of consultants and allocators. Success in this environment requires creativity, resilience, and a willingness to reshape traditional playbooks. For those who rise to the challenge, the rewards can be substantial.

 



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