Apr 1, 2011 12:00 PM

It pays to discover and use new talent to help with investment decisions

By David Johnson

Limited partners (LPs) (for example, family offices) who seek exposure to new and emerging alternative asset managers face a dilemma. They understand that asset managers are most motivated and in sync with their LP's goals when the asset managers are first starting out. But an initial willingness to invest with a lesser-known alternative asset manager may be met with resistance based on the new manager's lack of a track record. The inability of some to re-imagine due diligence in a broader sense has prevented too many LPs from backing the next generation of private equity and hedge fund managers. The opportunity cost of failing to develop a new/emerging manager program is substantial: Such a failure deprives LPs of the opportunity to reap out-sized gains from backing as-yet-undiscovered talent.

There's a well-established approach to due diligence for alternative asset managers. This approach focuses largely on prior performance and, to a lesser extent, on other contributing factors. LPs using a traditional due diligence approach will expect a successful investing track record (comprised of several investments taken from initial investment through a profitable exit) from any manager and will also be concerned that the manager has demonstrated expertise in a proposed investment niche. The traditional approach also addresses several other matters, such as access to quality deal flow, thought leadership and strength of investment, though they tend to be eclipsed by the importance of both track record and expertise. Due to the maturation of the alternative asset class, the traditional due diligence approach has evolved to focus on “known entities” and to assess their compatibility with a specific LP's risk-return tolerances; this is a very effective means of assessing established alternative asset managers, but a remarkably inappropriate one for assessing new/emerging ones.

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

Poll

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

Click here to download the 2011 Trust Glossary

50 Years Ago This Month

Click here to read the issue.

50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

Click here to view the most up to date guide (September 2011)

Press Releases