New Jersey opens up to Next Gen managers

The $96 billion New Jersey Division of Investment is expanding its emerging manager programme beyond private equity to include real estate and private credit.

Investments with minority and women-owned private equity fund managers already comprise 18.7 per cent of the total market value of the pension fund’s $11 billion private equity programme.

Now New Jersey will allocate more to experienced spinout teams and return-generating seed investments, in line with its commitment to improve DEI in America’s $70 trillion asset management industry of which only 1 per cent is managed by people from under-represented groups.

“The chance to build long term relationships, and being there at the beginning, investing in the first fund and seeing how the team evolves, is really rewarding,” says Dana Johns, New Jersey’s head of private equity and chair of the Private Equity Women Investor Network, a passionate advocate of next generation investment managers who has spent much of her career understanding the risks and opportunity of the sector.

New Jersey launched its emerging manager programme in private equity in 2022, kicking off in the asset class with the largest universe of emerging managers, most new fund creation, and more managers with a historic track record. Alongside deepening DEI in the portfolio, the programme has supported diversification by enhancing exposure to lower middle market opportunities which have historically outperformed relative to larger funds.

Rolling the programme out to other asset classes will allow the fund to enhance exposure to unique and niche opportunities from which it is typically excluded because of size, track record, and assets under management constraints.

Getting into the portfolio

Emerging managers seeking a place in New Jersey’s portfolio need more than a deep understanding of their investment strategy and an experienced track record of exits and distributions. Some of the most probing questions Johns asks centre around how new managers are building and running their business.

Finding a partner, raising, and deploying capital (often raising for a second fund as soon as the first has closed) and building a team is an arduous task.

Johns likes to know if the team spun out together or if they have come together for the first time to launch a fund. The latter, she says, poses more of a risk.

“If two individuals are coming together for the first time, institutional investors need to understand their prior investment experience and how they came together. LPs elevate business risk when underwriting a first time fund manager. Sometimes emerging managers ability to manage the business is more of a risk for LPs than the investment strategy itself,” she says.

Johns says the skills set and deep level of experience she looks for make the term emerging manager inappropriate. “I prefer the term Next Generation rather than emerging managers because these are investment professionals who have been doing the job for a long time but have decided to go it on their own.”

Size matters

New Jersey’s program is centred around a platform of Separately Managed Accounts that allows the investor to target small investment sizes. Emerging manager fund sizes are typically between $100 million to $1 billion and New Jersey prefers not to account for more than 20 per cent of any one fund. “We write cheques of upto $25 million that overtime will grow to 12-14 commitments to these managers.”

Size is also an issue around graduation. She says managers will only graduate to the main portfolio if, and when, they can scale to absorb larger cheques of between $100 million to $200 million. “Not all managers will move into the larger portfolio because some of them might not be able to scale,” Johns says.

A $200 million fund is not the right fit for a large LP seeking to allocate $1-2 billion a year, she continues. “These managers need to be smart about who they talk to and smart about building their network, “she advises. “They should approach the LPs that are the right size and a better fit for smaller managers. This is why we built our platform.”

Engagement

New managers can expect close contact with her team. New Jersey is closely involved with the managers on its platform, particularly via the LPAC seat. Mentorship, advice and “direct impact” will include sharing broad industry knowledge; whether to use credit lines, or how new managers should diversify the LP base for their next fund.

“We can introduce emerging managers to other LPs focused on building their emerging manager programme,” she says.

Johns treads a sensitive line when it comes to negotiating fees and counsels against “going in and pushing new managers down.” They have invariably sunk all their resources, including their own net worth, into their new fund. She says for many of these managers, every 2:20 is vital to long-term success.

But that is not to say it’s not possible to draw other LP benefits from taking the risk of supporting new partners build their portfolio. This could include first refusal on opportunities to upscale commitments, access rights to financial statements, or opportunities to build a co-investment sleeve where there are zero fees, zero carry, and size fee breaks.

“There are different ways to approach fees, and it is important managers are set up for success. We take the opportunity to minimise fees as much as possible while not putting the manager in a situation that could be detrimental to the fund.”

Challenges for emerging managers

Unlike some asset owners that are overweight private markets New Jersey was under allocated across most private markets. It means the fund has been able to allocate capital to emerging managers “at a full pace” across venture, growth and buyout within private equity.

But she acknowledges that today’s challenging market is making it harder for emerging managers. It has triggered a flight to quality with fewer, large funds absorbing a bigger portion of available private equity allocations and increased competition for investment dollars.

“There is a big knot in the system right now where LPs are constrained. They need dollars back before they can reallocate to new opportunities.”

In other trends, LPs are seeking to consolidate the number of general partner relationships to reduce risk and keep portfolios efficient.

But Johns also notices that ever-larger GPs could serve to increase the number of experienced spin outs and opportunity for LPs with an emerging manager programme.

And New Jersey has previously voiced concerns at the ever-growing size of external manager private equity and debt funds, flagging the risk of allocating to asset gatherers, where managers harvest lucrative management fees but are slow to invest because they are hampered by executing and deploying billions of dollars.

Despite her oftentimes pessimism at the level of DEI in the asset management industry, Johns passion remains undimmed. The satisfaction of seeing a new manager roll out successive funds and generate success for themselves and their LPs drives her on.

New Jersey is holding an emerging managers virtual symposium on June 26.