Why Invest in the US EDM?
Just as significant as diversity of investments is diversity of investment managers, particularly when studies have shown that diverse, emerging managers often deliver the superior returns LPs want.
The chart below by Thomson Reuters, the world's leading source of intelligent information for businesses and professionals, shows the degree to which diverse managers have outperformed their big-name counterparts over a 13-year period. These diverse-managed firms are also nimbler and more able to quickly capitalize on shifts in the markets. It also proves that these boutique firms can actively compete against their larger counterparts and capitalize on new opportunities for wealth-creation and job-growth in areas that are often overlooked by the broader market.
EDMs are also nimbler and more able to quickly capitalize on shifts in the markets. And as the demographic shift in the US continues to drive new investment opportunities in diverse markets, it’s the EDMs who have the required skill sets needed to identify and capitalize upon them.
Source: Thomson Reuters, August 2012, Net Returns Since Fund Inception, U.S. 1998-2011 vintages (excluding 2002).
There are a number of ways. The NAIC helps diverse managers understand the fund-raising landscape, the limited partners and what they are looking for. We also help form a strategy refinement standpoint in order to identify unique characteristics of a firm's investment strategy and establish points of differentiation from other members.
The universe is much larger than some might think. As it relates to private equities, it’s estimated that there are approximately 50-60 ethnically diverse owned private equity firms in various forms. They range from funds in formation that are attempting to raise their first funds through firms that have been in existence for five to 15 years that have successfully raised multiple funds.
These firms are generally located in cities where one would find the big-name financial services firms, with the highest concentrations in New York and California, respectively. There are also high concentrations in Chicago, Texas, Florida, Atlanta, and Washington, DC.
The diverse owned firms have in common a number of things with themselves, as well as the general marketplace. With themselves, they're all owned by people that come from a diverse ethnic background. They've gone to the top schools in the country, they have worked at the big firms on Wall Street, and within the private equity industry, and they have gained tremendous experience across that time period. They have then chosen to go out on their own, take on the risk of developing a firm and raising a capital and have more control over investing and building successful portfolios.
It runs the gamut as there are diverse firms in every investment category. There are diverse private equity firms and there are also firms in the venture capital space. There are firms in the growth and expansion capital space. There are also mezzanine capital and credit firms and distressed debt firms as well as firms that provide fund of funds and other advisory services.
Most of the firms get their capital from public pension plans, also known as defined benefit plans. They also get funds from corporations that have defined benefits plans and in some cases may have other initiatives where they're investing capital off of their balance sheet. Insurance companies, foundations, endowments, and sometimes high net-worth individuals and families also have invested with our firms.
The first thing they provide is a diversity of networks. Most private equity deals are sourced through individual relationships. Diverse owned firms bring networks that are unique and fresh. As these firms are typically smaller and earlier in its lifecycle, they are often more aligned with the interest of their investors than perhaps a larger firm with far more assets. And in many cases, the leadership of these firms have very successful and have had to outperform in every stage of their life.
It starts in-house with the LPs own asset allocation. And once they've done their asset allocation and they've identified which portion of their assets they want to invest, then they would reach out to the NAIC and we would freely provide them a list of names and references for which managers might be a fit.
For example, if an LP looks to place a $100 million in buyout or $50 million in growth and expansion capital, the NAIC has managers in each of those categories that it can source. Once the LPs receive the names and background information they can begin their own due diligence process. Alternatively, we can assist LPs in meeting a fund of funds that is already invested in the marketplace, has a wide expertise and performs diligence on these firms and they can be engaged to help develop a strategy and build out a portfolio.
There are too numerous to cite any one specific deal, but NAIC members from 2000 to 2012 (the last period of time we studied) outperformed the private equity market by about 100 basis points. We have investors who have sourced their own deals that are 4X, 5X, 6X return of capital. There are numerous deals across a population of 30 to 50 managers that have been investing actively for the last 10 to 20 years.