Where are the modern day Oaktrees, Silvercrests, Silchesters, Champlains, Magellans, Mawers, GMOs, etc.?
As advisors and/or funders to a number of commercial-grade investment management startups—including several of the names above—the subject matter has been a preoccupation of ours for over 30 years. But over the last decade, risk appetites for starting commercial investment businesses have noticeably dried up. Why?
Compensation and ownership perspectives are the primary ingredients. Personal and competitive compensation “requirements” have become far more important than the prospect of creating substantial value and sharing fairly in it. Industry pay has proved attractive and resilient for even mediocre PMs, relationship managers and operators. Successful professionals are rarely considering both taking significant pay cuts and helping fund a new entity. The founders of each of the above firms did so, as did countless others in the 1970s-2000. Equity among the boutique set has come to be viewed much more as a compensation enhancer and entitlement, not a foundational orientation and/or risk proposition.
There are multiple other factors at work. Oversupply across most asset classes and widespread pressure on allocators and intermediaries have made it much harder to start at dollar zero or de minimis AUM. Emerging managers more often submerge than emerge, and often such firms get out of the gates with fragile infrastructure and limited functional expertise, relying on a key person or two. And it’s an even harder proposition for the preferred return/high watermark business model, where getting behind the eight ball early or often spells doom. Startups of significant personal means can fall back on their own capital; those with little means face daunting odds and the Shark Tank quandary from backers and allocators (i.e., are they willing to give up what it will take to get a deal done). Non-solicit agreements are ubiquitous and daunting. Meanwhile, recruiters are constantly seeking quality professionals for their clients. And what if early performance is soft, or worse? Staying power is hard. Challenging markets, personal tragedies, etc. all can add up to unlucky outcomes -and timing is always a big part of the equation.
And yet our discussions with gatekeepers and allocators across the global investment industry make it clear there is keen interest in uncovering modern-day startups who really have what it takes – and are built to absorb multi-year business risk. What GQG and DoubleLine have accomplished over the last five to ten years is remarkable and rare.
To be clear, commercially sustainable startups face a high bar. The vast majority of startups are lifestyle pursuits with little or no long range planning. Their success correlates strongly to the founder’s (or founders’) abilities and timeline. Commercial grade startups launch with clear leadership, functional excellence across the board, a tenured pedigree, significant client loyalty, a distinctive investment engine, and alignment across all constituents.
For most startups over the last 50 years, business risk was a simpler and more intellectual consideration than the stomach-churning reality it is today. And yet for many owners of investment businesses – financial institutions, outside investors, clients – their priorities will shift and their patience/timeline will prove finite as markets fall and pressures build. Size, scale and relevance will be under the microscope.
This market dislocation should be a springboard. The backdrop includes ample financing, a sea of mediocrity in which to stand out, material wealth creation over the last decade, and allocators seeking excellence. Business stress is likely to shine a light on diverging interests and priorities, creating an opportunity for ambitious, capable, entrepreneurial leaders to emerge.
Even in the current market carnage, opportunities are germinating. Perhaps a new generation of commercial-grade startups are on the way.
Rosemont Investment Group is a private investor in asset and wealth management companies, backed by permanent capital. Over the past 20 years we have been minority equity partners in dozens of firms, in all cases majority-held by employees. We serve in a non-controlling advisory role, providing solicited guidance on issues ranging from high-level strategy to functional decisions and assist in business and corporate development. www.rosemontinv.com