Infovest21 's Just Released Investor Focus: What investors should look at in selecting a seeding platform

About 25-30 seeding platforms are active today, say a number of seeders. This is down from about 50-90 between 2006 and 2008.

Investors should look at the seeder’s experience – that is the key factor, says Robert Discolo of PineBridge Investments. “You need people who’ve been doing this for a long time and during different cycles. They have to have a lot of relationships and experience. Due diligence of emerging managers is very different from due diligence on regular funds because you have limited data to work with.”

He says investors should also look at prior seeds’ experience and performance. Investors also need to look at the worse-case scenarios – how many problems and how many blow-ups have there been. Also look at risk controls the seeders have in place and how they monitor it.

Seeders provide their IRR which is a construct from the private equity world. It is an indicator of the investor’s economic return; it is based on cash flow. “…if a seeder gives money to a manager and then pulls it back after three or four years, the seeder still has a revenue share. The IRR can’t go down because there is no money at risk. The additional increases in IRR are based on the profit share for each individual manager,” adds Discolo.

Another veteran seeder suggests that other metrics be examined besides IRR such as gross return, net return, cumulative draw down, the amount of assets distributed, unrealized value and total value. Fee income is another important metric which reflects the manager’s ability to gather assets i.e. distributions relative to paid-in capital.

Institutions and seeding
Institutions are increasingly looking at seeding arrangements.
In the summer of 2010, Rock Creek won a mandate from New York State Common Retirement Fund to manage the first installment of the pension’s new emerging manager program. Rock Creek is playing a key role in developing the emerging manager hedge fund portfolio, focusing on newer firms, firms with assets totaling less than $500 million, and women- and minority-owned fund management companies.

At that time, the $132.6 billion pension fund has about $5 billion committed to emerging managers. Of that, about $2 billion was in private equities and $3 billion in public equities. The pension is now developing a similar program in its real estate portfolio.

Other pensions with emerging manager programs include New York City Retirement System, California State Teachers Retirement System and California Public Employees’ Retirement System.

As of September 30, 2010, CalPERS had $1.3 billion in its MDP programs, close to $600 million in the emerging manager funds of funds program (which is part of the external manager program via FIS and Leading Edge), about $539 million in the fund of emerging hedge fund program (which is part of the Risk Managed Absolute Returns Strategies program). In the latter program, CalPERS had about $143 million with PAAMCO’s fund of emerging funds, $201 million with Rock Creek fund of emerging funds and $194 million with 47 Degrees North.

CalPERS’ Performance - Emerging Manager Fund of Funds
FIS Group
Inception date: Feb 2008
AUM $M: $269
YTD Return(%):0.87
Last 1 Year Return(%): 2.08
Last 3 Year Return (%): N/A
Since Inception Return (%): -0.11

Leading Edge Investment Advisors

Inception Date: March 2008
AUM $M: $298
YTD Return (%): -0.63
Last 1 Year Return (%): 0.76
Last 3 Year Return (%): N/A
Since Inception Return (%): -0.70

Source: CalPERS Global Equity Program Review, Oct 18, 2010

Excerpt from just-released Infovest21 Investor Focus