To state the obvious: It’s easier to launch your first fund if you have personal capital.
It’s not just about having the money to invest. Operations, data, research, and accounting all can eat up capital before emerging managers even get to start building their portfolios. But by tapping into general partner stakes, lines of credit from investment managers, and personal capital, emerging managers across asset classes have managed to successfully launch their firms.
Four fund managers, including Mala Gaonkar, who recently debuted the largest hedge fund launched by a woman, shared how they were able to start their firms from a financial perspective at the TRS/ERS emerging manager conference, held virtually on Wednesday. The conference was hosted by two Texas public pension funds, the Employee Retirement System and the Teacher Retirement System.
Gaonkar, who was a founding partner at hedge fund Lone Pine Capital, founded her new firm, SurgoCap Partners, in 2022. She credits the availability of her own money with giving her the space to build her new fund’s culture and the team itself.
“My number one focus, and obviously the benefit of having some personal capital to invest in this, was to say, ‘Okay great, let’s focus on finding a CFO and COO who could build out the operations to build an institutional platform,’” she said.
Then, she said, came the process side of things. She wanted to give her newly minted investment team, which she hired after bringing in a CFO and COO, time to work together without managing outside capital. Using her personal capital allowed the team to make tweaks to its investment process ahead of raising outside investments.
It worked: SurgoCap reportedly raised $1.8 billion, according to Bloomberg.
Like Gaonkar, Sherrese Clarke Soares, the founder of Harbourview Equity Partners, said she had a personal liquidity event that allowed her to start building her royalties-focused investment firm. Eventually, she added, the firm partnered with private equity giant Apollo Global on a staking deal.
“Having partners who can help you think through scale and scaling your platform is a good reason to do it,” she said. “It takes some patience to build a large-scale organization. There’s some benefit to having the right partner.”
Jennifer McElyea, founder of Ethos Real Estate, noted that the GP stakes business has changed to favor founders. “What’s interesting now is that there are investors who are willing to stake platforms but still allow founders to retain ownership,” she said.
McElyea also works with an outside partner. Her firm focuses on affordable housing and public-private partnerships, a challenging area of the real estate market to invest in. She revealed that between fees from legacy investment assets and a line of credit from GCM Grosvenor, the firm was able to get itself off the ground.
“That’s smoothing things over so we can stand on our own two feet,” McElyea said.
Nick Antoine, founder at supply chain and logistics investment manager Red Arts Capital, took longer than his fellow panelists to seek outside capital and partners.
“When we started, in the back of our minds was [the idea that] we might want to raise a fund someday,” he said. “We want to build relationships early, but we want to stay focused on building our platform.”
The group took capital from personal liquidity events and reinvested the money into its team. Seven years after its launch, Red Arts Capital was able to tap relationships it had built with Texas Teachers’ Kirk Sims and Grosvenor allowed the firm to raise capital.