Do you invest in first-time fund managers?
4 min read · March 17, 2023
New Power Labs
We see encouraging signals of diverse fund managers investing in diverse communities, unlocking capital to underfunded and overlooked founders while creating positive financial returns. Many of the diverse fund managers making waves are also first-time managers.
For some investors, investing in first-time fund managers is hard. From the limited track record, more difficulties in assessing their abilities and predicting how they will perform, to the size of fund (most first time fund managers have smaller funds under management) to the perception of risk, some are hesitant to invest in first time fund managers.
The data show that first-time fund managers present an overlooked financial opportunity:
Compared to non-first-time funds, first-time funds have higher median net internal rate of return across most vintages since 2000. Compared to similar funds, 31% of first-time funds fall in the top quartile, with 23% in the second. (Preqin)
A 2020 report by Cambridge Associates found that first-time venture capital funds outperformed other vintage funds, with a median net IRR of 21.4% for 2010-2014 vintages, compared to 16.5% for all other funds. (Cambridge Associates)
A survey by the National Venture Capital Association (NVCA) found that first-time funds raised in 2016 had a median net IRR of 18.2%, compared to 13.5% for all other funds. (NVCA)
These US-based studies provide a good proxy, with encouraging evidence to suggest that first-time fund managers can represent successful investment opportunities. First-time fund managers are often highly motivated to succeed and establish a track record of success. They are willing to take risks and try new approaches that more established managers may be hesitant to pursue, which can lead to a fresh perspective on deal flow and investment strategies. First-time fund managers have an opportunity to expose market imperfections, such as underfunded and overlooked markets and communities that have been historically neglected as a result of undue perceived risk, as an example.
Now, given the nature of our financial systems, many first-time fund managers are also more representative of Canada’s diversity, signalling a shift in power where deployment decisions are in the hands of more diverse capital deployers. And data show that diverse managers are investing in diverse founders:
Female funders are two times more likely to invest in startups with one female founder and three times more likely to invest in a female CEO. (GenderSmart)
Black investors are three times more likely to invest in Black founders. (Accenture)
Investing in diverse fund managers can help advance capital to underfunded and overlooked communities and unlock new market opportunities. It can be a powerful lever for advancing equity and generating financial returns. And beyond the benefits of inclusion, we’re seeing that greater diversity of fund managers can result in better financial performance. Diverse fund managers can perform better:
Gender-diverse fund management teams deliver an incremental 10-20% in net internal rate of returns compared to teams that are not gender-diverse. (IFC)
Funds with underrepresented individuals in management had a median one-year total return of 29.6% and those with women represented in management returned 21.6%. Fund managers without those attributes had a 12.7% gain in that period (Bloomberg).
In Canada, first-time, diverse fund managers are making waves. Amplify Capital, a women-led Canadian impact venture fund, closed its Fund II at $30.7M. Their first fund in 2016 closed at $5.8M. Black-led, woman co-led BKR Capital, the first venture capital fund dedicated to Black-led businesses in Canada, closed $18.5M in 2022. And Raven Indigenous Capital Partners, the first Indigenous-led venture fund in Canada, announced in January a historic $100M Indigenous venture capital fund to support Indigenous and Native American entrepreneurs, following their first fund that closed at $25M.
Do you invest in first time diverse fund managers? How does this show up in your impact investing strategy?
Investing in new, diverse fund managers committed to investing in underfunded and overlooked communities is a lever to shift capital to advance equity. Here are some resources to support your journey:
GenderSmart, now merged with 2Xglobal, has a guide to equip allocators with best practices when investing in first-time fund managers, linked to their First-Time (Women and Diverse) Fund Managers Investing with a Gender Lens initiative.
The Due Diligence 2.0 Commitment includes recommendations that are more inclusive to first-time funders, such as considering alternatives to track record and reassessing asset-under-management as a risk metric.
Diverse Asset Managers Initiative (DAMI) produced the Fiduciary Guide to Investing with Diverse Asset Managers and Firms to help interested LPs, institutional investors, and foundation and university endowments, who are interested in exploring the possibilities of investing institutional assets with diverse-owned asset management firms.
And if you’re looking for deal flow, consider New Power Match - a free service we’ve launched to match aligned impact investors and investees. Learn more here.
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