Evaluating emerging managers

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Ricardo Kanitz, Partner at Ocroma Alternative Investments, the only PE fund of funds in Brazil, presented an interesting analysis of how to evaluate emerging managers in Brazil. As he pointed out, today in Brazil there are only four established fund managers with long track records. However, there are a total of 130 fund managers competing in Brazil. This increase in the number of fund managers was driven by the recent local PE market development. Most of the fund managers, thus, are emerging managers. These managers do not have a measurable track record of the fund and are risky, but they probably have higher motivation, better alignment of incentives, and better potential returns.

Ocroma combines a top-down and a bottom-up analysis to evaluate fund managers.

Ocroma’s top-down analysis reveals that despite the bad economy of the 90s and some early failures from a few PE funds, average returns have been more than satisfactory in Brazil. Over the last 30 years, a group of 35 fund managers posted a gross IRR 32% in U.S. dollars.
• On average, first time funds returned 33% versus 30% from the experienced fund managers
• Mid-market returns were higher than the small ones (less than $10m) and large ones ($100m)
• There isn’t a sector that significantly outperforms the others, but the real estate and utilities sectors have generate above average returns

Ocroma’s 8 Ps of bottom-up analysis of Brazilian fund managers:
1. People (experience, skills, motivation, ethics, incentives to perform, middle manager professionals),
2. Performance (track record and lessons learned)
3. Product (achievable and sound strategy)
4. Process (decision making, investment methodology)
5. Partnerships (banks, lawyers, originators)
6. Pipeline (quality, volume, speed, flow)
7. Portfolio (confirmation of the team’s value add at the portfolio companies)
8. Price (adequate terms and conditions guaranteeing alignment of interest and investor’s protection)

Combining the most attractive fund strategies, with the best managers in a balanced portfolio seems to be the key to selecting the ideal emerging manager portfolio.