On this episode of Fund Flow, host Jon Finger talks with Elizabeth Weindruch (Liz), managing director at Barings, about building lasting relationships with the emerging manager community. When looking for GP partners, Liz seeks those with experience, value alignment and an element of differentiation in their investment strategy.

“You can no longer buy low, sell high, or buy a business and slap a few terms of debt on it and sell in a few years and make a profit,” Liz explains. “There's got to be some level of differentiation to your approach. You need that differentiation to win when you're competing to buy a business, then you also need it to be able to come in and create value.”

Liz shares advice for emerging managers on the different channels they can use to build relationships and expand their network. She recommends meeting as many people as possible and showing up at key events and conferences to maintain those relationships. Later in the episode, Liz explains how her firm approaches diversity and discusses trends to watch over the next 12 months.

💡 Featured Guest 💡

Name: Elizabeth Weindruch

What she does: Liz is a member of Barings’ Diversified Alternative Equity team and is responsible for originating and underwriting funds and co-investments in North America and Latin America. Prior to joining the firm in 2015, she was at the Wells Fargo Investment Institute, where she led the strategy, due diligence, implementation, and support efforts for private equity and private real estate products across the alternative investments platform. She also held various private equity roles at Citi Private Bank, Brooke Private Equity Associates, and Investor Group Services. Liz has a B.A. in Political Science from Davidson College.

Organization: Barings

Connect: LinkedIn

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You are listening to Fund Flow, a podcast for emerging managers offering insights into the journey of new and aspiring fund managers seeking to have access in a crowded market. Tune in as McGuireWoods partner and host, Jon Finger, is joined by guests ranging from first-time fund managers to proven emerging managers, experienced LPs poised to back emerging managers, and other key participants in the emerging manager ecosystem. Hear their real-world perspectives and gain actionable tips to help inform your strategy and position yourself for a successful fund closing.

Welcome to Fund Flow, a McguireWoods podcast for emerging managers. I'm Jon Finger, and today I'm pleased to be joined by Liz Weindruch, a managing director on Barings' Diversified Alternative Equities team. Liz is responsible for originating and underwriting new funds and co-investments globally, specializing in lower middle market emerging managers. Prior to joining Barings, Liz held a variety of roles in alternatives at Wells Fargo and Citi Private Bank. Throughout her career, Liz has been a champion for diversity, equity, and inclusion, and also sits on Barings Women's Network. Importantly, Liz recently joined us at our McGuireWoods Emerging Manager Conference a few months ago as a speaker on the panel about improving diversity in private equity through emerging managers. Welcome, Liz. Thank you so much for joining us.

Thank you, Jon. Happy to be here.

Thank you. Let's start, and talk a little bit about your investing history and how it led to where you are today with Barings.

Sure. So my career path wasn't exactly linear. So I actually started out working in politics in Washington DC for a few years before doing a quick reboot and starting a role in consulting in about 2004, where the clients that I was working for were lower middle market private equity firms. So that was my first exposure, really, to the asset class in general. And I enjoyed it. I was very interested. I was intrigued, and so went from that role to more of a buy-side investment role where I started out underwriting co-investments and fund commitments to small buyout private equity sponsors. So that was really my first exposure to private equity.

I then have spent time underwriting funds really across the size spectrum as well as the geographic spectrum. I have also worked across investing in credit and throughout real assets, including real estate and natural resources and energy, but have found my way back to what I'll say, really, the roots of my investment career which all started out investing in small, lower middle market private equity managers. And back when I started, there really wasn't a segment of the market called emerging managers. I think if you look back at the things that I've done in my history, that's what you would call it if you look back today. But that's how I got to where I am now, and it's hopefully where I'll be for the rest of my career.

Sure. So maybe talk a little bit more about what really attracts you to this segment. What drew you to work with emerging managers as opposed to more established GPs? And give us some insights there.

Sure. So when I am looking at opportunities in the market, I tend to be drawn to situations where I see the potential for outperformance. And so if you look across history, you'll see that smaller funds, and funds that are investing in smaller businesses and really that are going after the smaller end of the market, tend to outperform the larger segment of the market. And so I'll say there's a lot of very interesting qualitative and fun dynamics that go along with investing with emerging managers. But first and foremost, I'm investing with emerging managers because I'm looking to generate outperformance.

And so you'll see a larger opportunity set at the lower end of the market. You'll see the opportunity to invest in businesses at lower purchase price multiples, and to use a little bit less leverage. And emerging managers or lower middle market private equity sponsors are typically acquiring founder, family-owned businesses, where maybe there's not a formal finance function, right? There's a controller in place. So there are opportunities to professionalize the business and create value, and a lot of low-hanging fruit within those businesses to do so. And that's why I like working with emerging managers. That's why I like working at the smaller end of the market, because there's just the opportunity to generate outperformance within the private equity asset class.

So Liz, how does your approach to the emerging manager community really aim to create a lasting, durable relationship with GPs?

Sure. It's a good question. And private equity is such a long-term business that it's really important to start generating great relationships early on. I'll say my approach, and the approach that we apply here at Barings, is we start really early. And by early, I mean early in what I'll call the life cycle of an emerging manager. So we start having discussions with GPs, sometimes even before they have spun out from their prior organization. So if you're a GP and you're listening to this and you're thinking of spinning out, you can give me a call.

We start talking really early to GPs. And I'll say that, because we've been doing it for a while, we get a lot of inbound requests of, "Hey, I'd like to start my own firm. I'm thinking about doing this. What should I be considering as I'm trying to build up my track record, as I'm trying to build up my team?" And so what we start doing early on is having discussions with folks who are thinking about spinning out. And they come to us for what I'd say just confidential advice and counsel, probably not unlike they maybe talk to you, Jon. I imagine you probably have similar conversations too.

But they come to us, and what we like to do is provide some early advice, some best practices that we see in the market, because typically, you'll see great investors within these blue chip institutions where all they have to do all day long is figure out how to make good investments and how to create value. They haven't thought about the fact that they're going to have to stand up a back office, they're going to have to hire a team, they're going to have to go out and raise a fund. And all of those things are a little bit daunting if you haven't done it before.

And so those are the types of things that we talk about. Those are the conversations that we have. And I'll say we're having those conversations with groups today that ... They may not come out and raise a fund for years. And so I like to say that we have a lot of different groups in what I'll call incubation, because they're in various portions of their life cycle of thinking about coming out and starting their own firm.

Well, that support is obviously one of the reasons why I'm excited to have this conversation and keep putting out you and Barings there, because to your point, it's so critically important. And it's something these emerging managers, as a general matter, are super hungry for. The question is less so necessarily writing a check, but more so pursuing a long-term partnership with, helping them in a variety of different ways. What are the most important considerations for you, in light of 24 hours in a day? What is critical for you as to the GPs that you want to choose to spend your time with and pursue a partnership with, broader than just writing a check, putting in your time and effort into the relationship?

It's a good question, because it is so much more than writing a check. And the things that we really think about when we're choosing GPs that we want to work with, I say this all the time, is that we will invest in first-time funds but not in first-time teams. And so the considerations and the things that we're really looking for are experienced teams. And so that means hopefully more than one person who has ... A couple of folks who have worked together at a prior institution making investments that are similar to or almost exactly like the strategy they want to pursue at their new firm.

The second criteria that is probably just as important is alignment of interests. So people don't wake up in the morning and say, "Hey, I want to be an emerging manager." And so you have to prepare yourself. And it takes a lot of capital, and it takes a lot of drive and support from your family and everyone else in your life if you want to start your firm. And so it's everything from creating your business plan and hiring the right people to draft all of your documents and things like that. But it also comes down to committing your own personal capital to your transactions and to your fund. And so we look to invest with people who are strongly aligned. When we win, they win, and vice versa, because we want to make sure that we've got strong alignment at every step along the way.

The last consideration I think is important is really just differentiation. And I think that the private equity market has evolved a lot recently. And so you can no longer buy low, sell high. Or you can no longer buy a business and slap a few terms of debt on it and sell it in a few years and make a profit. There's got to be some level of differentiation to your approach. You need that differentiation to win when you're competing to buy a business, but you also need it to be able to come in and create value. And so a lot of times we'll talk with sponsors, say, "Why does the world need another lower middle market sponsor? What are you doing that is different from someone else? And how is that going to translate into your strategy?" I'd say experience, alignment, and differentiation are really the key things that we're looking for.

You mentioned differentiation and touched on it a little bit. One of the ways we certainly have seen that play out, as you have, is sector specialization. How do you view that part of differentiation within the broader landscape of what makes this GP different than others?

So if you'd asked me that question five years ago, I would've told you sector specialists outperform generalists. I don't know if that is necessarily the case anymore. I would say we definitely prefer sector specialists, particularly in sectors like healthcare or consumer. I don't think that you can dabble in those sectors and do well. Or maybe you could, but I think that there's also some pitfalls associated with that too.

So we like sector specialists, but even going a little bit broader when it comes to specialization, we think about specialization even as it relates to a sourcing angle, or a sourcing program that someone has, right? Most groups have a cold-calling program, or a CRM. What are you doing that's different when it comes to sourcing? Other groups have operating partners and operating capabilities that are their form of differentiation as well. There's also ... I would call it the deep value turnaround specialists, that I would say also have a level of differentiation. And maybe it doesn't come out in the sectors where they're investing, but it's the types of deals that they're doing too. So I think that having a level of specialization is really important, but it does not necessarily have to be sector specialization.

That makes sense. So as you think about the guidance, the advice that you're providing to emerging managers in today's environment, whether it's re-ups, whatever it may be, a challenging fundraising environment as a general matter, what is the guidance you're giving GPs today on their strategy and how to navigate the fundraising environment?

I think that the best piece of advice right now is to be patient. To be honest, it's a really tough market out there. I will say that limited partners want to know and understand when you're going to be back in market, and they want to know that early. Right now, we're planning out our pipeline and what we're going to be doing through 2024. And so it's not helpful for me when I hear from a GP in July of '24 that, "Hey, we're coming back this year and we're going to have a close by the end of the year."

And so I'd say being proactive and communicating with your LPs outside of your capital raising cycles. LPs are tracking their portfolios and they should know when you're going to be coming back to market. But I'd say just really making sure that you're staying in front of them, giving them plenty of notice, allowing people to start and do work early if they can. And then I'd say, and most GPs are doing this at this point, is straddling their closes so they're allowing LPs to invest out of multiple vintage years. And so if an LP is fully spent for '23, but they could use $24 and commit in '24 ... And I've even seen some investors double-dip and commit in both years. And I'd say just patience and flexibility are probably the two pieces of advice that I would give to GPs right now.

That's great. I want to circle back, Liz, to what you talked about early on, and it's this idea about being a true partner, I think, to these emerging managers beyond just the capital investment. Would you talk more about some of the resources and assistance that you and others on the team provide to these emerging manager relationships that really does differentiate Barings from a lot of other LPs?

Sure. So I mean, I could talk about our emerging manager toolkit that we have, that we talk with all of our emerging managers about, about the requirements and what it takes to really build your firm and be successful. But I think that it really goes beyond that and it's a little more qualitative. When we come into a fund and partner with a manager, we do it with conviction and we do it in a way where we try to amplify our fund commitment. Between me and others on our team, we have over 500 conversations with other limited partners in private equity every single year. And in all of those conversations we're maybe doing referencing, but we're also talking about what we're doing and, "Hey, have you heard of Manager X, Y, Z? We did a ton of work. They spun out of this place. We think that they're great. You should spend some time with them. And if you do, call us as a reference and we'll tell you how we got there." That's a pretty powerful conversation.

And there's a lot of my peers out in the market that I know and trust, and they will have similar conversations with me. And it's a strong reference, but what we do is we're very proactive with providing positive references for the GPs that we know and that we like and who we've committed to. And so what we have found is that over time, it'll create a little bit of, potentially, a market buzz. And then it also will allow other LPs who know and respect us to come into that fund as well.

And so between that and also just ensuring that they've got great partners, like you guys at McGuireWoods as well, we're trying to just be there for them to help them raise capital, but also ... I'm trying to think of just some other examples. Your Emerging Managers Conference, almost all the emerging managers in our network, we told them about that, said, "Hey, come to this. This is a great way to meet other investors and some of your peers." I know that registration was closed at a certain point and you were kind enough to let a few of my friends who are emerging managers attend the conference. And so just things like that, where we're trying to be helpful. We truly want all of these managers to be successful, if we invest with them or not. For the ones that we do commit to, I like to say we're one of their biggest and loudest supporters in the market.

Love it. Thank you. And thanks for your support for the conference as well, Liz. One of the most important things that I want to make sure we talk about, and we talked about at the conference ... As you think about diversity and inclusion, maybe talk about how that permeates within your investment strategy as it relates to new emerging manager relationships, and then also how do you view that through the lens of an emerging manager's portfolio?

So first, I'll say that for us and for our team, diversity and inclusion is very important. And it starts with how we view ourselves. So we are a women-led team. Two-thirds of our investment committee is women or diverse. 50% of our investment team is women or diverse. That's within the Diversified Alternative Equity team at Barings. And so because that's how we're comprised, that's also how we go to market and how we source and how we just think about the world.

And so I'll say first and foremost, it's very important to us when we're thinking about the GPs that we partner with. Now all that said, you and I both know that it is not the most diverse industry. So we take a pretty broad approach when we're talking about diversity with the GPs we work with. We obviously love to see women and diversity within the actual partnerships. And we think about that in terms of who's receiving the carried interest for a given fund vehicle. So if a firm is 50% women and diverse, because that's their entire analyst class, it does not necessarily count for us. But you do get some form of credit in that you recognize that diversity is important, and you want to promote from within and home-grow your team. We also know that the right thing is not to go out and just make senior hires just to make senior hires.

We think about the composition of the investment teams within private equity firms, but then to your further point, we also think about how that is reflected in their underlying portfolios. And it's very interesting. There's a GP that we partner with who ... There's not diversity within their partnership, but within their portfolio, they are ensuring that there are equal opportunity hiring policies. They are implementing whistleblower hotlines, and doing all the right things. They're tracking the numbers of employees, they're tracking the metrics of diversity within their portfolio companies, just to ensure that it's data that they have their hands on that they know and they understand.

And I'd say that, to us, is really important. And so a certain group's philosophy around diversity may not be reflected on their team page, but you can certainly tell in how they're investing and how they're managing their portfolios.

That's great. Well, again, appreciate everything you're doing to champion that within the industry. We touched on, a little bit earlier, the current landscape for emerging managers. I don't think we need to spend too much time beating that horse, but as you think about trends that you've seen over the years, within the emerging manager landscape, are there any that you find particularly interesting observations? And then maybe a bit of a corollary but related, what do you see for the next 12 months, within the emerging manager fundraising landscape, for the listeners?

So some trends that I would point out are that I think that the bar for ... I'm going to call them fund commitments for emerging managers. The bar's gotten really, really high. And so what you're seeing is, I think, more people who want to be emerging managers, but starting their journeys as independent sponsors. And this happens a lot when you've got a couple of partners, maybe, who don't have a long working history together, maybe didn't work together at the same firms, but have a good relationship coming together and doing deals on a one-off basis, and single asset SPVs in advance of coming to raise a fund. So what they're looking to do is build a working history and build a track record.

And I think that the market wants to see that more often than not, even if you've got folks that have worked together at a prior firm. And I just say that because I think that for someone to come out and just raise a fund one, without operating outside of their prior investment organization, is pretty tough. And I think that is almost the exception at this point. You typically tend to see folks doing things more on a deal-by-deal basis. And I don't think that was the case five, 10 years ago.

Your question around trends or predictions over the next 12 months, I do think that regardless of market conditions, I think you're going to continue to see people spin out of larger institutions. And in fact, there are a couple of situations right now where you've got one large organization where several people have left and they're building up their own practices. So I think you're going to see more and more spin-out teams. I think you're going to see the market continue to embrace those teams and continue to like them.

I also think that you're going to probably see a lot more of larger institutional investors figuring out the most efficient ways to access those opportunities as well, because what ends up happening is an emerging manager will raise a first time fund of maybe $250, $300 million, and that automatically boxes out a lot of larger investors who just have to write larger checks. And so I think what you'll tend to see is more opportunities for those larger investors, if they're large public plans or large corporate pensions. You'll see ways for them to access those opportunities.

And maybe spending a little bit of time, Liz, talking more about the Barings viewpoint. I think it's helpful as emerging managers get to hear from you, know what's important to you, hear your advice, hear how you're differentiated. Would you spend maybe just a little bit of time talking about different strategies within private equity, whether it's buyout, venture, real estate? Maybe just give the listeners a little bit of flavor for how you think about the different strategies.

So I'd say our areas of focus right now are growth equity, buyout, infrastructure, and natural resources. I'd say we've ruled out investing in venture capital, and not because we don't think there's great emerging managers out there with venture-oriented strategies, but because we, I think, like the opportunity set better in buyouts and growth equity. I think we like potentially the lack of volatility within that segment of the market as well. We just think that there's a lot of great opportunities, really, within traditional buyouts, growth equity.

Within infrastructure, we're more focused on, I'd say, that next generation of infrastructure investing that tends to be comprised of things like data centers and battery storage, as opposed to your old school infrastructure investors who are investing in toll roads and airports. And within natural resources, we are highly focused on investing in and around the energy transition, but also making sure that we're doing it in a risk-adjusted way that makes sense. So those are the various strategies that we like, if it's an emerging manager or established manager. We don't think about the world or strategies any differently. But those are sort of the things that we're interested in and things that we like right now.

That's great. Thank you for sharing. Want to spend time and just talk a little bit around the guidance again. You've talked about the fundraising environment, differentiation. If you sit down with an emerging manager these days, what are some other pieces of advice you give them for how to be a successful emerging manager when you're looking to spin out? When you're looking to really establish yourself, your brand, what are some other things that you suggest is important for the emerging manager to focus on?

So I think I said this earlier, but patience is definitely top of list. I would say if you want to start your own firm and you want to go out and raise a fund, that patience is the first thing that you would need to have. Fundraising timelines have been extended. I think that, typically, funds would be raised between 12 and 18 months, and we're seeing upwards of 24 months as we track fundraising extensions across our portfolio. So we think it's taking longer and longer to get your funds raised.

I would say be patient, be resilient, be tenacious. Make sure that you're out there. I think that a lot of emerging managers maybe discount the fact that they should be attending conferences, they should be out on the various conference service that are out there. And in addition to what you guys do, there are several other industry events that are pretty well-attended by groups like us that are focused on investing in emerging managers. And so I'd say you can't be everywhere all at once, but refine your list of places to go to ensure that you're going to meet people that are interested in investing with you.

And I'd also say be flexible. Be willing to partner up on a deal or two with some investors as a way for them to get to know you, and for you to get to know them. I would say talk to as many groups as you can and talk to as many people as possible, and just stay the course and stay patient. And that's really my advice.

Yeah. And maybe just a bit of a corollary, Liz, thinking about an emerging manager who closed their first-time fund in the past 12 months now shifting focus a bit less so getting those checks, getting to a closing. What advice do you give your emerging manager relationships who ... Now they've closed on a fund, what are some of the things that you try to highlight as they pivot in their journey?

This is going to sound very basic, but do what you said you would do. And I mean that in that if you went out and you raised your fund around investing in a certain deal type and a certain strategy, most GPs go out and say, "Hey, we're buying businesses between $5 and $15 million EBITDA in business services and industrials." So as you're putting the dollars to work that you raised, don't go out and buy a $2 million skincare deal. And I say that in that it sounds very, very basic, but once you're kind of heads down and you're taking a look at your pipeline, ensure that the deals that you are doing are consistent with the strategy that you told your investors that you would do.

And that is something that I think gets lost on some folks. So doing what you said you would do, and be very measured, and be very, very careful with those first few deals that are coming into the portfolio, particularly if you close your fund or even if you're still out there raising, because if your first couple of investments go south for whatever reason, you're going to end up spending the majority of your investment period trying to rescue those deals as opposed to really going out and diversifying your portfolio and doing new and better deals.

And I would also say that the math would dictate that if within the first, I believe, 12 to 18 months, if your portfolio is marked below cost, 30% below cost, it's really, really hard to dig yourself out of that J-curve. And given that managers are coming back to market more quickly, people are using subscription lines of credit to boost IRR, you need every minute and every dollar to be working efficiently for you to generate that IRR so that you have strong performance so that you can get a re-up when you come back to market.

That's great. Well, I appreciate those insights, and really everything you're doing to support the emerging manager community. It's a team effort, right? And so I appreciate everything you're doing in support of the managers throughout their life cycle. So thank you for that. And Liz, thank you for joining me today on Fund Flow, sharing your insights, giving some background on Barings. Obviously, hopefully, we'll get some new relationships that you can start to curate. And thank you to our listeners for joining us on this latest episode of Fund Flow. We hope you join us again next time.

Thank you for joining us on this episode of Fund Flow. To learn more about today's discussion, please email host, Jon Finger, at jfinger@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved, and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.