CalSTRS announces a new $1.4 billion investment program in emerging managers, focusing on early-stage venture capital in the US.
Emerging managers offer a different dynamic in the venture capital industry, often managing capital that is not their own and investing in new and emerging technologies and networks.
Constructing an LP portfolio involves considering objectives, risk appetite, and the fit of different funds and strategies, as well as understanding market dynamics and effective firm management.
Deep dives
Key Point 1: Graduation Rates of Emerging Managers
Historically, there has been a low graduation rate from fund one to fund four for emerging managers, with only 17% making it to fund four. The percentage increases slightly to 22% for those who make it from fund four to fund eight.
Key Point 2: CalSTRS' $1.4 Billion Emerging Managers Investment Program
CalSTRS has a long history of investing in emerging managers and has recently announced a new $1.4 billion investment program in emerging managers, specifically focusing on early-stage venture capital in the US. The program aims to continue the innovative and forward-thinking approach that CalSTRS has had in investing in emerging managers.
Key Point 3: Differentiating Emerging Managers from Established Managers
Emerging managers, typically defined as funds one through three, offer a different dynamic in the venture capital industry. These managers are often managing capital that is not their own for the first time and may have a wider array of fund types, managers, and vehicles. Established managers, on the other hand, have a track record, experienced teams, and often larger fund sizes.
Key Point 4: Benefits and Risks of Investing in Emerging Managers
Investing in emerging managers has several advantages. They have the potential to outperform, bring new and diverse perspectives, and often invest in new and emerging technologies and networks. However, investing in emerging managers also carries risks, such as the lack of proven track records and the challenges of investing in funds with smaller sizes.
Key Point 5: Best Practices in LP Portfolio Construction
LPs have diverse objectives and preferences when it comes to portfolio construction. Some prioritize capital preservation, while others focus on fund-level returns and the ability to make direct investments alongside managers. Constructing an LP portfolio involves considering objectives, risk appetite, and the fit of different funds and strategies. LPs also emphasize the importance of understanding the market and exit dynamics and the need for effective firm management and team dynamics.
Elizabeth "Beezer" Clarkson, Partner at Sapphire Partners, discusses how their new partnership with CalSTRS will allow them to expand their ability to support the next generation of VC managers – all while continuing to focus on investing in the established. We’re proudly sponsored by Tactyc, visit tactyc.io if you’re ready to level up your venture fund.
(0:00) Episode Preview
(0:57) The Importance of LP Voices and Sapphire’s Partnership with CalSTRS
(2:15) Why Investing in Emerging Managers Have Such a Unique Dynamic
(4:09) The Role Emerging Managers Play in the Construction of a Compelling Portfolio
(6:16) Thousands of Emerging Managers vs Forty Established Funds
(7:30) Does Excess Capacity Translate to Adverse Selection?
(8:17) “LPs are like Snowflakes and They’re all Different.”
(10:49) Common Reasons Why LPs Don’t Re-up
(13:48) What Makes for a Great Manager?
(16:27) Episode Sponsor: Tactyc
(17:34) What Sapphire Looks for When Evaluating a New Manager
(19:00) Who Wins: Generalist v. Specialist
(21:57) Will Solo GPs be able to Survive in this Market?
(24:38) Beezer’s Predictions on Spinouts
(26:34) The Bias and Rationale Behind Institutional LPs Desire to Re-up in Existing Managers
(28:14) The New CalSTRS Program’s Investment Rubric on Checksize, Fund Size, Return Profile and Audit Requirements
(30:37) How LPs Can Bring Value to a Fund
(34:31) Why LPs are All Examining Their Portfolios
(36:42) Should GPs Focus on DPI or TVPI?
(39:01) Why Venture Needs More Innovation
(40:19) How LPs Diligence Managers
(44:15) The Importance of Transparency within the LP Ecosystem
(51:57) What Sapphire Invests In
(53:26) Lessons Learned from Previous Downturns
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