Let’s be real: some of the biggest names in finance like BlackRock, Goldman Sachs, Kleiner Perkins, and VistaEquity rake in top-dollar fees, earning their keep in what you could call “Fee City.”These giants can thrive regardless of their fund’s performance, primarily because their size gives them access to massive capital and reputation-driven returns.
But here’s the thing: while these financial powerhouses play a significant role in the market, smaller fund managers are carving out an equally important niche. Much like small businesses are the backbone of the U.S. economy, smaller fund managers are becoming the backbone of private financial markets, offering fresh, specialized opportunities that may be overlooked or too small for the institutional giants.
The Advantages of Investing with Smaller Fund Managers
Smaller fund managers, particularly those managing less than $50 million in assets under management (AUM), operate in a space with unique advantages:
- Access to Overlooked Opportunities: Because larger funds often have to write hefty checks—sometimes between $10 million to $50 million—they’re precluded from making smaller investments that don’t move the needle for them. This creates a gap in the market that smaller funds can step into. Whether it’s niche private equity deals, local real estate investments, early-stage venture capital, or regional private credit opportunities, these managers thrive where big funds don’t dare to go.
- Specialized Expertise: Small fund managers often operate in localized markets or have deep expertise in a specific industry, geography, or asset class. They leverage this knowledge to gain a competitive advantage, often outperforming larger funds. Think of it as playing on their home turf with all the insider knowledge—except here, “insider” means knowing a niche inside and out.
- Performance-Driven with Skin in the Game: With smaller funds, there’s no room to coast. These managers are typically all-in, often committing a higher percentage of their own capital to their funds than their larger counterparts. If they don’t perform well, they’re risking their careers. As a result, they have a higher incentive to deliver strong results, keeping fees in check and transparency high.
- Easier Access and Stronger Relationships: Want to speak directly with a manager to ask questions or gain deeper insights? Smaller fund managers are typically more accessible, with less red tape than institutional giants. They also tend to be more generous with their reporting, making them an excellent choice for investors looking to learn and stay informed.
Real-Life Examples: Opportunities in Action
Here are a few intriguing cases of smaller fund managers making big moves:
- Lower-Middle Market Private Equity: A fund specializing in buyouts of business owners with no succession plan is focusing on a specific region where the partners have deep, decades-long ties. Their experience and local relationships have already secured their first five deals under letters of intent (LOIs), positioning them to offer value where larger funds simply can’t gain traction.
- Multi-Family Real Estate: A General Partner (GP) with a history of buying and selling multi-family properties is now launching their first fund. They target a growing market with an influx of residents fleeing high-tax states, leveraging their community ties to access off-market opportunities that out-of-towners might miss.
- Early-Stage Venture Capital: An investor with two successful funds under their belt is sticking to their niche of sub-$50 million early-stage investments. Their goal? To be the most value-add partner for founders at the earliest stages, where their market expertise and relationship-driven approach make all the difference.
The Bottom Line: Why Consider Smaller Funds?
Smaller fund managers are positioned to be the backbone of private investing for several reasons:
- Many young finance professionals are choosing to break off from big-name firms to build their own track records.
- With the right connections and know-how, sourcing opportunities is more feasible than ever before.
- Smaller funds often operate with a strong sense of accountability, given their direct financial stake and career dependence on fund performance.
Despite the inherent risks of investing in smaller funds, the rewards can be substantial. For those willing to venture into less-publicized opportunities, smaller fund managers offer afresh approach and potential for meaningful returns.
Disclaimer
This blog post is for informational purposes only and should not be taken as financial advice. Investing in smaller fund managers involves risk, and you should always consult with a professional before making investment decisions.
If you’re a fund manager looking to connect, or if you’re an investor curious about exploring these opportunities, reach out. We spend considerable time sourcing and conducting due diligence on smaller fund managers across various asset classes, and we’d love to share what we’ve learned.