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As investment complexity grows and excess returns become harder to source, the Decagon team has found that investors are looking for innovative ways to efficiently assess emerging managers during the allocation process. In response to investor needs, the Decagon team has developed a framework, a Foundation Assessment, for evaluating the durability of an emerging manager.

An emerging manager is commonly defined as a firm with assets of less than $300 million and a track record that is shorter than 3 years. Investors looking for diversification and enhanced return potential view a small asset base as a strategic benefit on the manager’s part in that it can be easier to execute certain strategies with fewer assets.

Initial screening with the Foundation Assessment’s 3 pillars covers a team’s positioning (internal and outsourced), strategy and investors with an eye to supporting firm durability and avoiding major sources of risk to firm alignment. Pillar I reviews a team’s leadership caliber, infrastructure and financial incentives. Pillar II assesses strategy capacity and opportunity to support the firm’s budgetary needs. The final pillar (III) focuses on investor loyalty and the team’s “skin in the game.” The appendix lists sample queries that can help to uncover the intentions and business commitment within the foundational decisions of a newly formed manager.

Following this initial Foundation Assessment, benchmarked measures within Investment Thesis and Operational Due Diligence offer a meaningful comparison to seasoned competitors. Surprising to some, many emerging managers may be nimbler in establishing best practices to meet the new higher expectations stemming recently from increased regulatory and diligence standards. Their ability to quickly adopt automated processes and implement redundancies are often the result of investor feedback and consultants advising them during the formation process.

By deploying this Foundation Assessment as a preliminary screen, investors may develop a view on an emerging manager’s future longevity as measured by the alignment of opportunity, stakeholder balance and scalability.