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Why quality manager selection within private markets matters
08 May 2025
In private markets, the performance gap between the best and worst performing managers may be significantly wider than in traditional public assets. As a wealth manager, have you considered how a manager’s ability to generate superior returns can be the key factor in the success of your clients' investments?
We believe selecting the right managers is necessary for building a strong portfolio. A disciplined selection process, long-term relationship-building, and localised research are essential for accessing high-quality investments. Are these elements part of your current approach to manager selection? By focusing on these factors, you can significantly increase the likelihood of achieving optimal performance for your clients.
Fund performance dispersion by strategy (vintage years 2005-2019)
Source: Pitchbook data as of June 30, 2024
The chart shows the wide dispersion of returns, between top and bottom quartile managers, across different private market asset classes.
Four key pillars for manager selection
When evaluating private market managers, we believe wealth managers should focus on four key pillars: business management, alignment, strategy, and track record. Each pillar provides important insights into the potential of a fund and its ability to generate consistent, high returns over time.
The strength of a private market firm’s leadership is essential. We suggest looking for managers with a proven track record, solid organisational structures, and experienced teams. Firms led by seasoned co-founders with a clear vision and backed by long-tenured professionals tend to be more stable and resilient. This is especially true for firms specialising in early-stage investments, where close collaboration with Limited Partners is key to success.
Alignment of interests between fund managers and investors is paramount. This includes scrutinising fund terms, any changes from previous funds, and ensuring the mutual interests between both parties are firmly aligned. We suggest favouring private market firms with broad ownership stakes, as they promote team stability and better succession planning. Additionally, look for firms that distribute carried interest across the team, so investment professionals remain motivated and incentivised.
Evaluating the fund’s strategy involves examining its investment focus, sourcing processes, and ability to create and protect value. Many strong firms have cultivated a robust investment platform, built a wide network, and utilised a hybrid approach to deal sourcing. Additionally, they typically maintain high levels of ownership in their investments, aligning their interests with those of their investors and providing added incentive to drive long-term value.
A fund's track record speaks volumes about its capacity to deliver on its promises. Key areas to evaluate include value sourcing, capital allocation, investment pace, and the balance between realised and unrealised performance. We suggest favouring managers who consistently perform in the top quartile and maintain a low loss rate. The better firms demonstrate liquidity generation, operational excellence, and a steady hand through market cycles.
Further considerations for selecting managers when evaluating semi-liquid funds
The semi-liquid fund market is still emerging, making it difficult for wealth managers to find long-term performance benchmarks due to the lack of established track records. As new funds continue to enter the market, assessing those with limited histories becomes a challenge, often requiring wealth managers to rely on the managers' experience with closed-ended funds that share similar teams and processes. Valuation is another hurdle, as semi-liquid funds must accurately assess private, non-traded investments, unlike publicly traded funds that can use market prices. Managers also need to ensure they can meet liquidity needs, which varies by fund strategy, and gating mechanisms, while protective, can restrict access to capital during high redemption periods. We believe wealth managers should be cautious not to equate a strong brand with effective fund management, as past success does not guarantee future performance, making thorough, forward-looking due diligence crucial to avoid costly mistakes. To explore this topic further and gain deeper insights.
Maintaining investments with top-performing managers requires a proactive, ongoing approach
As circumstances evolve - whether due to succession changes, partner departures, or shifts in organisational dynamics - establishing strong communication channels between investors and managers is essential to mitigate potential risks. Even with a well-performing portfolio, it is sensible to keep an active pipeline of high-quality managers. Despite frequent claims of top-quartile performance, investors must rigorously evaluate each manager, discerning which firms truly stand out. We believe complacency in private markets can be costly, so ensuring sustained, reliable performance demands continuous and thoughtful manager selection.
Selecting quality managers is just one component of a successful multi-asset private market strategy
Wealth managers also require access to a comprehensive private market toolkit that encompasses strategic partnerships, SAA and portfolio construction, investment vehicles and platform access, portfolio diversification and liquidity management, as well as compliance and administration oversight.
To learn more about why top-quartile manager selection matters and how to strengthen your private market strategy, read our latest blog here.
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