I’d like to think I’m not big into snap judgements, but a recent trip to the left coast in super-glamorous coach showed me that I’m completely full of it on that front. As I sat in my window seat waiting for my fellow fliers to board, I quickly sized up each and every passenger as they came down the aisle to determine whether they were someone I wanted to share air (and an armrest) with for the next four hours. 

I mentally begged for the tiny old ladies. Anyone the size of a professional athlete (save maybe a jockey) I tried to psychically hurry past my row. I mean, seriously, those coach seats aren’t wide enough for a five-foot three figure skater, let alone a member of the NFL. 

In fact, I still sometimes have flashbacks to a flight a couple years back when I was marooned next to a professional bowler for five hours. He was completely lovely, for what it’s worth. He even offered me a piece of gum mid-flight. Sadly, when he pulled said gum out of his pocket, it had liquified. I guess the heat that had built up to Dante’s Inferno level between our inexorably connected hips was just too much for a pack of Juicy Fruit to take. 

Yeah, just thinking about that again kind of made me throw up in my own mouth.

Anyway, after the tall but sinewy gentleman took the middle seat on my recent flight, I had plenty of time to think about investment industry stereotypes as I tried not make arm or thigh contact midflight. And since I’m often picking on managers in this blog, I decided to fixate on investors for once. 

So here you go! 

It’s a completely unscientific, grossly generalized profile of the five investors most money managers meet.

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The Tomato Seed– As a Southern girl, I know a thing or two about tomatoes. I know that any tomato eaten before the month of July (or after the month of September) is likely to taste like a whole lot of nothing. I know that, after a certain age, I’ll be required to grow tomatoes if I want to continue living in the South. And I know that tomato seeds are slippery little buggers. Seriously, try cutting a good beefsteak tomato on a cutting board. Now try to pick up one seed on your finger. I bet it squished away from you, didn’t it? Tomato Seed Investors are the exact same way. You can try to pin them down on something (a phone call, a visit to their offices, a due diligence trip, a date for subscription docs to arrive) and you just can’t quite to get them to stick. Tomato Seeds may employ a variety of tactics to slide away… “I’m sorry I didn’t see your email.” “I’m in another city that day, try again next trip.” “Contact my assistant (she’s out for maternity leave)…” but the result is always the same. 

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The T-Rex-  You’ve seen a T-Rex right? Not a real one, obviously, but a rendition or skeleton of one, I’m betting. You know how they have really short arms? Picture those arms trying to reach into their pockets to grab a wallet. There’s no freakin’ way, right? T-Rex Investors similarly have very short arms and very deep pockets. They may say all the right things about how great your strategy is or how they love your team and your energy. They may even go through the full due diligence dance before all is said and done. But they never actually hand you any money. T-Rex Investors are one of the trickiest to deal with in the wilds as you don’t actually know who they are until you’re at least two years in. Up until that point, you kind of have to keep being nice and going through the motions, but once you’ve met a T-Rex, you’ll always be a bit scarred by the experience and perhaps even prone to pushiness with future investors. 

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The Ghost– For anyone who has ever dated on Tinder, Bumble, Match or, hell, just dated period, The Ghost is a familiar figure. You meet The Ghost Investor at a conference or event. You have a great conversation. There’s terrific follow up. You have another meeting or talk shop over a lovely Merlot. And then The Ghost, well, ghosts. You send emails that fly into cyberspace, never to been seen or heard of again. You leave messages on every available phone the investor has but get no return call. You contemplate hiring a medium to see if you can raise The Ghost Investor from the dead, all to no avail. The Ghost has disappeared, likely never to be seen in more than passing again. They may appear as a brief apparition at a conference but are usually viewed in passing (as they spirit away from all the managers they’ve ghosted before) or from a distance. 

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The Doorknob– One of my ex-boyfriends was a doctor. He liked to tell me how his day was over dinner and more than a few gin and tonics. Some of the stories were sad, some had delightfully happy endings, and some were SSDD. The most common refrain was complaints about patients who waited until Doctor Dude’s hand was literally on the doorknob, walking out of the exam room, to tell him that something else was wrong. It could be small, like an ingrown toenail, or utterly ridiculous in a “Hey-doc-did-I-tell-you-I-faint-every-time-I-walk-up-the-stairs?” kind of way. Whatever it was, it always stopped Doctor Dude cold. He’d thought he’d reached escape velocity and then WHAMMO! There are investors who excel at The Doorknob, too. You jump through every hoop and are told, explicitly or implicitly, that a wire is imminent. Then, The Doorknob strikes. “Oh, hey…we were just wondering about the trader you fired three years ago…can you provide his contact details to us?” “Gee, we’re really close but we are actually going to need to chat with your compliance person again to get her perspective on your ERISA AUM.” “So, it’s probably nothing, but in our background check we discovered that your chief information officer has a criminal record and we’re gonna need to clear that up.” Whatever it is, it hits you in the face like a glass of ice water and it has to be dealt with before you get any moola. Makes you want a gin and tonic too, right? 

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The WOW– The WOW Investor (Walk On Water) is the rarest of all investors. They return calls and emails within a reasonable amount of time. Their due diligence process, however lengthy, goes exactly according to plan. They clear up issues quickly and efficiently. They understand that, in order to run a successful business, you actually need cashflow to pay talent and build infrastructure AND they don’t begrudge you making a little coin, too. They call when they have questions and potentially provide insight into how best to communicate with other investors. The WOW investor is the Holy Grail of Limited Partners. They can be confused with the T-Rex and the Ghost, at least for a period of time, but will distinguish themselves in relatively short order by, oh, writing a check or returning a call. If you are lucky enough to find a WOW Investor, you should do everything in your power to keep them happy, up to and potentially including offering them your first-born child. Your wife or husband may grumble, but then again, they’ve never had to deal with the less desirable types of investors. 

As you go about your capital raising business, be on the lookout for each of these types of investors. You may not be able to ID them as quickly as I could a potential seatmate on my flight, but you’ll get better at it over time. 

As someone who was born, raised, and has spent the majority of my life in the South, one of the things I’m required to love, besides SEC football, is Redneck Humor. From Trae Crowder, Corey Ryan Forrester, Roy Wood Jr., and Drew Morgan today to Ron White and Jeff Foxworthy a decade or so ago, I love poking fun at myself and laughing at my fellow rednecks. I can reliably drive on the backroads of Tennessee and come up with “You may be a redneck” moments every few miles, and my friends and me are up for our own hillbilly kudos when summer reliably finds us in a backyard with a baby pool and some PBR.

I even have a personal favorite “you may be a redneck joke” that makes me laugh every time I tell it:

“You may be a redneck if you think a tornado and a divorce have a lot in common – ‘cos either way, someone’s losing their trailer.”

 (2) 123rf.com

(2) 123rf.com

Bwhahahahah!

A recent trip to the WellRED comedy show in Nashville got me thinking about all the ways in which, I as a redneck, can be defined. It also got me thinking about how we categorize and group other people, places and things in an attempt to make cosmos out of chaos.

There are few places in the investment world where there is more confusion than in the world of emerging managers. Ask two people what constitutes an emerging manager and you’re likely to get two completely different answers. Is it small funds? How small? Is it diverse funds? Ownership or fund management? Is it new funds? What’s the cut off? Does the manager need to be local? Does the manager need to be certified? What counts as a minority? Frankly, I find that emerging managers swirl in their own vortex of uncertainty.

So to help everyone out a little bit, I thought I’d use my 11+ years in the emerging and diverse manager space to create a handy-dandy checklist to determine whether or not a fund may be emerging. After all, it seemed like a great project for a winter weekend when 0.5 inches of snow has me pinned inside the house like the Southerner I am.

You Might Be An Emerging Manager If…

…you have less than $2 billion in AUM and manage long-only assets. Although this may seem reasonable on the surface, since the largest long-only fund managers may control trillions of dollars (with a “T”), it may still be a little large. In an August 2017 study by Richard B. Evans, Martin Rohleder, Hendrik Tentesch, and Marco Wilkens looked at 3,370 separate accounts (“SMAs”) managing $3,671 million and found those in the 10th percentile managed $5.38m, the 50th percentile managed $128m and the 90th percentile managed $1,470m, with a range of accounts from 3 to 15 to 305, respectively. In line with research about mutual funds, the authors found better performance in the smaller SMAs, in part due to liquidity constraints and market impact costs, but also due to increasing management complexity as the number of accounts increased. Take a look at the research if you’ve not seen it yet.

…you have less than $1 billion, and really more like <$250 million, in hedged AUM. (There are only about 700 funds with over $1 billion, so if you’ve gotten to that milestone, beating out 9,300 of your peers, I’d say you’d emerged).

…your firm is owned at least 51% by women or minorities for official certification, or has 33% women or minority ownership if you want to get a bigger crop of funds from groups that historically have had less assets with which to launch funds, and therefore may have partnered with firms or individuals that dilute the ownership structure.

…your fund is managed by women or minorities. This can be key for investors who are looking for cognitive and behavioral alpha (or differentiated networks for private asset funds), and may be more important to some than ownership status.

…the minority ownership or fund management in question is done by a U.S. citizen.

…the minority ownership is not by fungible personnel who were given ownership status simply to qualify for MBWE status (wives, daughters, back office personnel, figureheads).

…the fund is less than three years old or is a Fund I, II or III.

…the fund is not part of a mega asset management complex.

…the fund meets the above requirements and is located in the same state as the certain potential investors (Illinois, Pennsylvania, etc.)

…the fund is owned by veterans or disabled veterans.

Now, obviously there are all kinds of competing definitions out there, and there are also practical implications for investors, particularly larger ones. For example, if an institution manages billions of dollars (with a “B”), it may be difficult for them to look at the smaller end of the spectrum of emerging funds without having to assemble a massive portfolio of managers. Still, I hope these definitions may resonate with folks out there who are looking to capture some structural, cognitive and behavioral alpha. They may be a more successful investor if….

 

Sources: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933546 Preqin, SBA 

I seem to provide this information to newer and smaller funds often, so I thought I'd cut down on repetition and provide all you gorgeous small, new, and diverse fund managers with a short guide to early stage investors. Now start smiling and dialing!

 (c) 1980 Paramount Pictures

(c) 1980 Paramount Pictures

State Plans To Prioritize

Arizona - Has made at least one investment in a large 'emerging' manager.

Arkansas - Teachers Retirement System reportedly tabled the program in 2008 but 2011 document shows active investments in MWBE managers. 

California - Looks for EM's based on size and tenure but prohibited by Prop 209 from looking at minority status or gender.

Colorado - Colorado PERA added an "external manager portal" in 2016 to make "it easier for us to include appropriate emerging managers when the right investment opportunities develop."

Connecticut - Based on size, minority status or gender. Awarded mandate in 2014 to Grosvenor, Morgan Stanley and Appomattox. 

Florida - Looks at emerging managers on equal footing with other managers. 

Georgia - Invest Georgia has $100 million to work with venture capital and private equity firms in the state. There is an emphasis on emerging managers and emerging funds per press reports.

Illinois - Perhaps the most active emerging manager state, based on gender, minority status and location. 

Indiana - Based on size, minority status, or gender. 

Kentucky - Reported $75 million allocation at one time.

Maine - Has made at least one investment in a large 'emerging' manager.

Maryland - Very active jurisdiction with details available online for gender and minority status manager information.

Massachusetts- Includes size, minority status or gender. 

Michigan - $300 million program.

Missouri - Status based on size. 

Minnesota - Past investments in emerging managers. 

New Jersey - Status based on size. 

New York - Status based on size, minority status or gender. $1 billion mandate in 2014. $200 million seed mandate in 2014.

North Carolina - Status based on size and HUB (minority and women owned) status.

Ohio - Status based on size, minority status or gender. 

Oregon - Emerging manager program in place. 

Pennsylvania - Status based on size with preference for minority or women run funds.

Rhode Island - Plan in place from 1995.

South Carolina - Status based on size.

Texas - Actively engaged with emerging managers. Status based on size, minority status or gender.

Virginia - Status based on size, minority status or gender.

Washington - Has issued prior emerging manager RFPs.

Oh, and if you reproduce this list, be sure to cite MJ Alts. Thanks y'all!

Seed Programs to Explore

https://www.hfalert.com/documents/FG/hsp/hfa-rankings/575025_Backers.pdf

Music to Groove To While Dialing for Dollars