Real estate emerging managers face a range of challenges after launching their new business. Managers must concentrate on performance and also remain focused on a plethora of other issues, including, but not limited to, technology, compliance and how best to grow and service their investor base.
Even during a time of turbulence in the market and rising interest rates, there are major reasons for optimism, as investors, though tentative, are still considering emerging manager investment opportunities.
It can seem as if large and established managers attract all the new allocations. A recent report, commissioned together with Private Equity Wire, shows that more than two-thirds of investors currently invested with emerging fund managers are drawn by their higher alpha opportunities or unique investment strategies. Often, the two overlap.
Innovation in technology is just as common for emerging managers as it is for established managers, sometimes more so, and the investment in technology is mostly driven by efficiency and automation needs, to reduce manual work for emerging managers. The reduction of the burden on thinly staffed start-up teams is critical.
The last year has offered yet more evidence that emerging fund managers are particularly vulnerable to market cycles. Still, the fundamental appeal of backing a budding firm—the promise of discovering a diamond in the rough—will always remain intact. A real estate emerging manager who can find their niche in an underserved market can bring strong returns to institutional investors supporting emerging manager programs.
Whether this translates into fundraising success depends on the managers’ ability to adjust to investors' most pressing needs. Market positioning is crucial and specialisms, whether relating to strategy, sector or region, can help emerging funds target more niche pockets of investors and build a solid track record.
As the data suggests, transparency and clarity of communication are key attributes for emerging managers.
During fundraising, it’s no longer enough to stress a manager’s innovative approach; this needs to be fleshed out in detail with a clear path for growth. The need for communication and transparency continues through the investment lifecycle—investors need reassurance during times of volatility.
Part of building this trust is to demonstrate the operational robustness and agility to react to market changes. The biggest challenges LPs face when they work with emerging managers relate to capacity—inadequate compliance frameworks or due diligence constraints, resulting in errors. These are deal breakers, and managers must equip themselves for the future and scalable growth.
Technology is key to future readiness. Managers are using tech-driven efficiencies to cut costs in the current environment. More advanced tools, predominantly AI, have the potential to enhance investment decision-making, boost competitiveness, and ultimately, level the private equity playing field. Many are scoping this potential, enticed by the prospect of “punching above their weight.”
That said, learning how certain systems can fit with a business’s unique needs is a challenging process, which is best started as soon as possible. In addition, external expertise, an increasingly popular avenue, can ease the burden and help discover and unlock more opportunities for real estate emerging managers and established real estate managers.
Looking ahead, hints of interest rate stability and murmurs of a friendlier fundraising environment are cause for cautious optimism among real estate emerging managers, particularly ones that position themselves correctly, finding and promoting their niche.
The challenges facing the real estate fund industry are vast. Data transparency, aggregation and management issues compounded by unique regulatory requirements and time-intensive manual processes leave many real estate funds searching for processes and technology to help them grow. At SS&C, our services and solutions are backed by technology that spans the entire fund lifecycle in addition to our real estate industry experts who give you a competitive advantage in the market to exceed investor expectations.
Download our full "Embracing the New – Decoding LPs’ Perspectives on Emerging Managers" report to discover the key trends that will prove all-important in the future—helping emerging managers take advantage of the huge opportunities that still exist.
Written by Amy Pearce