Becoming "Institutional Ready": Q&A with C. Ndu Ozor, Associate General Counsel, University of Michigan
In a recent webinar (Big Money: How emerging funds can stand out to attract institutional capital) we discussed the current market conditions for emerging managers, especially those seeking institutional capital. Our panel included valuable insights from C. Ndu Ozor, Associate General Counsel at the University of Michigan. In the Q&A below he shares helpful tips on becoming “institutional-ready,” why data is critical for operational due diligence, and how new managers can cut through the noise.
Q: Given your experience, what does “institutional ready” mean, especially when seeking to gain access to an institution such as the University of Michigan?
A: It depends on the audience. Institutional readiness for a large fund such as CalPERS is different when compared to a smaller private foundation with one billion dollars (or less) of assets under management. Institutional investors select managers to generate appropriate risk adjusted returns. For emerging firms, institutional allocators are seeking to identify managers with true potential for success while uncovering overlooked opportunities. When institutional investors are evaluating newer funds, they examine several areas, starting with the track record and historical performance within a target strategy. They may also delve into the investments that principals sourced at prior funds, and which investments the principals executed on (or not) and why. Furthermore, institutional investors assess the overall strategy and value creation projections to ensure there are ample deal opportunities within a given sector. Another important consideration is the fund’s management team and what challenges they have overcome, particularly if they have gone through one cycle of highs and lows, whether it's COVID or otherwise. Investors will gauge whether the team has a history of working together and can build and maintain momentum. The ability to positively reference the principles of a fund also has importance, as does the availability of co-investment opportunities. Lastly, investors will review asset allocation and portfolio fit along with an overall alignment of interests.
Q: What are some factors you consider beyond the first meeting, as you commence the diligence process? What are you looking for in first time fund managers?
A: Data is key right now, especially if it is tailored. There are various platforms that provide granular data, which is important to LPs. A robust data strategy helps new fund managers establish an operational base as they go forward. The operational due diligence should first be done in-house, as opposed to outsourced, such that there are no surprises for LPs (or when LPs perform their own ODD). Firms should have an understanding of who all the data suppliers are and ensure that the information is ready for their use.
"Data is key right now, especially if it is tailored."
Q: Are there any examples where your team has walked away during the diligence process that you can share with us?
A: There are circumstances that may cause investors to reexamine an investment -- for example, if an investor observes a pretentious quality in the thesis, such as differentiation for the sake of differentiation. A fund does not always have to be “different.” Sometimes simply looking for opportunities to operate more efficiently can demonstrate significant value. To ensure a compelling business model, investors may reverse engineer the investment thesis of a manager and build from the ground up to see efficiencies or deficits in the strategy. Another red flag is when managers are unwilling to say “I don’t know,” or “I will have to get back to you.” It is not necessary to always have all the answers. Honestly answering that you need to do further diligence is appreciated.
Q: What accelerates the deal timeline for you? What helps build the momentum for the manager to move quickly?
A: For larger institutions, there are many requirements and steps involved, which can be frustrating for emerging managers looking to move fast. A strategy with a first mover advantage can accelerate the process, particularly with an underlying belief in the thesis or a strategy developed in conjunction with the investor. For instance, investors may try to bump up their closing timeline in that instance so the manager can start to deploy the capital as quickly as possible (or to avoid warehousing investments). Approvals for the investment can also affect the timeline.
Q: How should an emerging fund cut through the noise?
A: Cutting through the noise can be difficult, especially if the size of the fund is too small for a large endowment. I typically recommend that emerging managers go through a process of accumulating publicly available resources and using those interview and strategy questions to formulate their responses ahead of time, regardless of whom they end up pitching. For instance, there are emerging manager programs at private foundations and colleges, such as MITIMCo. CalPERS and Texas Retirement System have robust sites that can be very helpful as well. Managers can go through the entire process outlined in these sources (without submitting a proposal) simply to hone their strategy, vet their operations for robustness, and other areas for institutional readiness. There are also lower cost conferences that are available to emerging managers, and I highly suggest making the most of your network.
Q: Any final thoughts?
A. Managers should make sure that there is a portfolio fit when looking at any program, especially when considering fund size. Larger endowments may be constrained from a check writing perspective if the fund size does not meet their requirements. For example, emerging managers in the 25 to 50 million dollar fund size may be on the smaller side for larger endowments (due to concentration limits). Emerging managers should also look at their overall economics and goals before they make choices (e.g., fee discounts, reduced carry, etc.) that may affect the fund over time, including subsequent funds.