Jay Ripley – Emerging Manager Selection at GEM (EP.470) | Capital Allocators – Inside the Institutional Investment Industry Brief

Key Takeaways

GEM prioritizes backing emerging managers for strong excess returns, investing early.
Jay Ripley transitioned from private equity GP to OCIO LP for an owner-operator role.
Emerging buyout managers are sourced by GEM from established firms' spin-offs.
GEM's independent sponsor program uses pre-fund co-investments for diligence.
Venture manager selection focuses on network strength and fund-size ownership ratios.
GEM invests day-one in hedge funds for fee discounts and direct manager access.
Manager selection emphasizes the investment strategy's attractiveness over individual talent.
GEM leverages AI for early identification and market surveillance of emerging managers.

Jay Ripley transitioned in 2012 from a private equity General Partner (GP) role at Stone Point Capital to an Outsourced Chief Investment Officer (OCIO) role at Global Endowment Management (GEM).
His motivation included a desire for an owner-operator path and a return to the South, specifically Charlotte.
Initially uncertain about the Limited Partner (LP) role, he gained exposure to LPs while raising Stone Point Fund VI, observing their dedication.
Ripley spent his first six months at GEM studying the industry, attending approximately 50 Annual General Meetings (AGMs).

Private equity buyouts are an apprenticeship business, with new firms typically emerging from individuals trained at established institutions.
GEM maintains a catalog of buyout firms to assess quality and consistency, anticipating spin-offs will replicate prior success.
Sourcing involves identifying individuals from institutions with challenging investment committees and a culture of asymmetry.
GEM's sourcing team seeks new spin-out opportunities through former employees, placement agents, headhunters, and inbound referrals.
The firm favors individuals who planned their launch after gaining experience and successfully closing deals, making a clean break from their previous employer.

Two main types of individuals launch new buyout firms: those with a long-standing intention driven by inherent risk-taking and 'opportunists'.
A significant cohort plans to launch after gaining sufficient experience and successfully closing deals, committing fully to the transition.
GEM does not provide a financial safety net for emerging managers, believing it discourages risk-taking.
'Opportunists' are increasing due to changing market dynamics, such as rising interest rates and increased cost of debt, making traditional deal-making less profitable.

GEM launched its 'small buy-out program' in 2014, targeting experienced private equity professionals who operate on a deal-by-deal basis.
These independent sponsors, often in their mid-career prime (late 30s to mid-50s), are supported to access a valuable segment of the investment market.
The program aims to generate strong returns in what GEM views as an inefficient market segment.
Pre-fund co-investments serve as a primary diligence tool, providing insight into a sponsor's operating style and decision-making before committing to a blind pool fund.

Independent sponsors find deals in a less crowded market, often sourcing off-market transactions from founder owners at mid-single digit EBITDA multiples.
These deals typically involve high-quality companies with owner-operators, where the sponsor acts as a successor to the founder.
Independent sponsors often possess deep industry expertise and partner with operators they have worked with previously.
The private equity landscape is increasingly specialized; GEM advises independent sponsors to start with a narrow focus to differentiate themselves and attract capital.
GEM works with career-focused independent sponsors who aim for long-term Limited Partner relationships, viewing them as multi-decade partners.

Venture capital manager selection is characterized by power-law dynamics and a bifurcation between mega-funds and emerging managers.
Emerging managers typically come from operational roles at tech companies or spin out of existing firms.
Many new venture launches focus on pre-seed or seed strategies, often backing former colleagues from successful tech companies.
GEM evaluates early-stage venture capital firms by focusing on how managers build durable networks and achieve a consistent ownership stake relative to fund size.

Managers spinning out of larger firms often raise substantial funds (e.g., $150-400 million), putting them in competition with mega-cap firms.
Persistence in venture capital returns may be less true now, especially in seed and micro-cap stages, which carry more 'lottery ticket' risk.
Managers increasing fund size significantly after early success can lead to blended returns that do not match initial high-performance expectations.
GEM employs a consistent approach to sizing opportunities, ensuring reasonable ownership-to-fund size ratios and strong networks.

GEM has a long history as a day-one investor in hedge funds, securing better economics such as fee and carry discounts and more favorable liquidity terms.
The firm prioritizes maintaining direct access to portfolio managers to influence terms and build conviction, which becomes harder as managers grow.
GEM prefers fundamentally driven long-short equity managers, sometimes with an activism component, over absolute return strategies requiring significant scale.
Evaluation criteria for emerging hedge fund managers include a strong short-side strategy, generation of true alpha (not closet beta), and a willingness to invest across the market spectrum.

Global Endowment Management has evolved from a boutique OCIO for endowments and foundations to partnering on private portfolios for larger institutions and family offices.
GEM aims to grow its assets while maintaining its reputation for high-quality, critically thought-out work, a core value since its founding.
The firm is exploring AI tools to identify emerging managers earlier and improve market surveillance, aiming to get ahead of opportunities.
The guest expressed disappointment with current AI tools' practical application in investment research, noting the promise has outpaced reality.