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Large Start-ups Raise Money More Easily but Perform Worst

Siewling Lay, Senior Analyst and Peter Douglas, Principal
GFIA Pte Ltd
September 2011
 

Launch size

The size of assets under management (AUM) is one of the more common factors many investors use in their initial screening process to come up with a preliminary shortlist of investable funds. Some investors, in particular the larger ones, might be constrained by their necessarily large ticket size, resulting in them only looking at funds above a minimum AUM. Others may be concerned about the costs associated with, and sustainability of, a fund with a small asset size. From our interactions with investors and fund managers over the years, we believe that the threshold AUM for a fund to begin to gain traction with professional investors is US$100 million. We see many new funds launch every year, but few have launch AUM sufficient to be immediately viable for institutional investors. In this research paper, we try to quantify some of the above qualitative observations. We look at the start-up AUMs of funds and how funds with different start-up AUMs performed, as well as their ability to attract capital subsequently.

Our universe consists of funds from the Eurekahedge Emerging Market database with data going all the way back to January 2000. We have included in this study only funds which reported AUM within one year from inception, and we regard the first AUM reported by the fund in its first year of operation as its start-up AUM. We observed that no funds in the database launched with an AUM of more than US$400 million. Large launches rely less on database visibility to raise assets, hence the lack of incentive to list on one. Our eventual universe consists of 510 funds, of which 172 funds had liquidated on or before May 2011.

In this study, funds are grouped into five different groups according to their AUM at inception.
The groups are defined as follow:

  1. ≤ US$5 million
  2. > US$5 million and ≤ US$10 million
  3. > US$10 million and ≤ US$25 million
  4. > US$25 million and ≤ US$75 million
  5. > US$75 million

We found that over the past 11 years, close to 70% of funds in Asia excluding Japan and Australia launched with an AUM of US$25 million or less. The average launch size of a fund over the same period was just US$23 million.

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