The Emerging Manager Premium Is a Myth: What the Return Data Actually Shows

LPs have repeated the same pitch for a decade: back the hungry Fund I manager, because emerging managers outperform. The data does not back that up. Kaplan and Schoar's landmark study found that performance persists from fund to fund within the same GP, meaning managers who were strong once tend to stay strong, not that newcomers systematically beat incumbents. A real premium does exist, but it lives in fund size, not in manager age.

The emerging manager thesis is one of the most repeated lines in LP marketing decks, and one of the least examined. The pitch goes like this: Fund I managers have something to prove, they take smaller checks into overlooked deals, and they have not yet grown fat on management fees. Therefore they outperform. StepStone has made a version of this case publicly, and it is not a fringe view. It is baked into how a lot of fund-of-funds and endowments allocate capital.

Here is the problem. The studies that get cited to support this idea are usually built on survivors. If you only look at emerging managers who raised a Fund II and a Fund III, you are looking at the ones who did well enough to stay in business. You have quietly deleted everyone who raised a Fund I, produced mediocre or bad numbers, and vanished. That is survivorship bias, and once you correct for it, the "hungry newcomer" story gets a lot weaker. This is my read on why the thesis persists anyway: it is a good story, it flatters first-time GPs who need LPs to believe it, and nobody in the fundraising chain has an incentive to run the harder analysis.

The Math Nobody Puts in the Fundraising Deck

Start with the most basic fact about emerging managers: most of them do not get a second act. Only about 63% of first-time VC managers from the 2006-2018 vintage years ever raised a second fund, according to PitchBook analyst notes. Put another way, more than a third of Fund I managers never got the chance to prove the "Fund II is even better" pattern that emerging-manager advocates like to cite as evidence of improvement over time.

That 37% who never raise Fund II do not disappear from the world. They disappear from the sample. Every study that compares "Fund I performance" to "Fund II performance" for the same manager is, by construction, only looking at managers good enough to survive the gap between funds. The managers who blew up, ran out of capital, or quietly wound down are excluded, because there is no Fund II data point to include them in a persistence study. This is not a minor statistical footnote. It is the difference between "emerging managers get better with experience" and "the emerging managers who happened to be good enough to survive get better with experience," which is a much less interesting claim.

The asymmetry shows up clearly in outcome data too. Research from Bella Private Markets found that 10.0% of first-time VC funds land at a TVPI (total value to paid-in capital, meaning what the fund is worth today divided by what LPs put in) of 0.6x or worse, compared with 4.4% for non-first-time funds. First-time funds blow up more often. But the same data shows 15.2% of first-time fund capital ends up in funds returning more than 3.0x, versus 6.3% for non-first-time funds. Read that pair of numbers together and you get the real picture: emerging managers are not a premium bet, they are a wider distribution. More disasters, more home runs, and a fatter tail on both ends. That is a risk profile, not an alpha source.

Kaplan and Schoar: The Study That Undercuts the Whole Thesis

The single most inconvenient piece of evidence for the emerging manager premium is not new. It is Steven Kaplan and Antoinette Schoar's 2005 paper in the Journal of Finance, "Private Equity Performance: Returns, Persistence, and Capital Flows." Kaplan and Schoar found that private equity and venture returns persist strongly from one fund to the next within the same GP. A firm that outperformed on Fund II tends to outperform again on Fund III. This is the opposite of what you would expect if hunger and alignment were the main driver of returns, because a Fund I manager's hunger, by definition, has nowhere to persist from. There is no prior fund to compare it to. Persistence of this kind points to something durable inside the firm: deal sourcing relationships, underwriting discipline, a network that compounds, access to proprietary flow. Those are things an established manager builds over multiple fund cycles. They are not things a first-time manager has yet, no matter how motivated the team is. The mutual fund industry, by contrast, shows almost no persistence: last year's winning stock picker is close to a coin flip to repeat. Private equity is structurally different, and Kaplan and Schoar's finding is the reason a lot of institutional LPs re-up with the same GPs fund after fund instead of constantly chasing new entrants.

If the emerging manager premium were real and were about hunger, you would expect the opposite pattern: reversion toward the mean, or even reversion away from a strong Fund I as a firm gets comfortable. The Kaplan and Schoar data found firms that were good stayed good, and firms that were mediocre stayed mediocre. Capital, appropriately, has followed logic like this. Established managers with four or more funds under their belt captured more than 70% of total VC capital committed in both 2022 and 2023, per PitchBook and Crowdfund Insider data. LPs are not naive. They are responding to a persistence signal that has been documented in the academic literature for two decades.

Where a Real Premium Actually Lives

None of this means "always pick the biggest, oldest fund." There is a real premium in private markets. It is just not where the emerging-manager pitch says it is. The premium is in fund size, specifically small fund size, and it shows up regardless of whether the GP is on their first fund or their eighth.

SIPA Metrics analyzed 586 buyout funds across 2013-2023 vintages in a study titled "Does Size Matter?" and found sub-$500M buyout funds delivered a median alpha of +5.6%. The worst-performing size bucket in the same dataset was not first-time funds. It was funds in the $1-5B range, the upper-middle-market segment that has become the default target for a lot of institutional capital precisely because it feels safe and scaled.

A 2025 NBER working paper (No. 33596) puts a number on the mechanism: a one-standard-deviation increase in PE fund size, about $2.06B, causally reduces net IRR by roughly 11% of the mean and net MOIC (multiple on invested capital) by roughly 26% of the mean. The paper's framing matters here. This is a causal claim about size, tested with methods designed to isolate size from other variables, not a correlation that could be explained away by "big funds happen to raise in worse vintage years." Bigger checks mean fewer high-conviction concentrated bets, more competition for the same large deals, and more pressure to deploy capital on a timeline rather than a valuation. None of that has anything to do with whether the GP is raising Fund I or Fund VI.

Claim	What the data actually shows	Source
Emerging managers outperform because they are hungry	Returns persist within a GP fund to fund; established managers who outperformed keep outperforming	Kaplan & Schoar, 2005
Fund I is the sweet spot	Only ~63% of Fund I managers ever raise Fund II; the rest exit the sample	PitchBook analyst notes
Bigger, more established funds are safer and just as good	$1-5B funds are the worst-performing size bucket in a 586-fund study	SIPA Metrics, "Does Size Matter?"
Fund size does not really drive returns	A $2.06B size increase causally cuts net IRR ~11% and MOIC ~26% of the mean	NBER Working Paper 33596, 2025

My interpretation of this data, and I want to flag this clearly as opinion rather than a sourced finding, is that the emerging manager label has become a proxy for something real (small check sizes, concentrated portfolios, less bureaucratic decision-making) without actually being the thing that drives the outcome. A 25-year-old GP's fourth fund at $350M can capture the same structural advantage as a first-time GP's debut fund at $300M. The premium tracks the size of the check, not the number of times the GP has raised one.

A Case Study in Both Directions

Consider how this plays out with two GPs raising in the same window. A first-time growth-equity manager spinning out of a larger platform in 2019, launching with a $150M debut fund, fits the profile LPs are told to chase: small, hungry, aligned. Some funds like this have gone on to post top-quartile numbers, and the emerging-manager narrative treats that outcome as the expected case. But the base rate says otherwise. For every debut fund of that size that becomes a marquee name, there are multiple others from the same vintage year and same size bracket that never raise a Fund II at all, whose LPs are still waiting on distributions a decade later. Those funds do not get case studies written about them. They get quietly dropped from the manager's website and the conference panel circuit. Meanwhile, a firm on its sixth or seventh fund, sized at $400M because the GPs have deliberately kept check sizes disciplined instead of chasing AUM growth, sits in exactly the size bracket SIPA Metrics flags as the best-performing bucket, with none of the survivorship risk of a debut vehicle. That firm is not "emerging" by any definition. It benefits from the same structural advantage, small fund, concentrated bets, without the roughly one-in-three chance of not making it to a second fund at all. If you are an LP choosing between these two profiles based on the word "emerging," you are choosing based on a label instead of the mechanism that actually explains the returns.

What Could Go Wrong With This Argument

To be fair to the emerging-manager camp, there are real caveats to the contrarian case too. Persistence data from Kaplan and Schoar covers a specific historical sample, and private equity as an industry has changed shape since 2005: more capital, more competition, more institutionalized diligence processes that may have already arbitraged away some of the advantage established firms once held from relationship networks alone. It is possible persistence has weakened in more recent vintages, and I have not seen a rigorous, recent replication that isolates this specifically. There is also a selection issue that cuts the other way from the one I raised earlier. Sub-$500M fund outperformance could partly reflect that disciplined small funds are run by GPs who chose to stay small on purpose, a decision correlated with skill and conviction. If that is true, the size premium and a genuine "conviction and discipline" version of the emerging-manager thesis, the version StepStone's own case for emerging managers gestures at, are not actually in conflict. They are the same phenomenon described two different ways. LPs should also weigh that first-time funds carry real operational risk beyond return dispersion: unproven back-office processes, thinner teams, and less-tested LP reporting.

Frequently Asked Questions

Does this mean LPs should avoid first-time managers entirely?

No. It means the justification should be the fund's size and strategy discipline, not the manager's fundraising history, and LPs should underwrite the roughly one-in-three chance that a given first-time manager never raises a second fund.

What does performance persistence actually mean in practice?

It means a GP's returns on one fund are a meaningful predictor of returns on their next fund, so a strong Fund III is more informative about a firm's future than a strong Fund I is, since the newer manager has no track record to persist from yet.

Why do $1-5B funds underperform smaller ones?

Larger funds face more competition for the same big deals, need to write bigger checks to deploy capital on schedule, and the NBER research found this size effect causally reduces both net IRR and MOIC rather than merely correlating with weaker vintages.

Is fund size a reliable stand-in for the emerging-manager premium LPs think they are buying?

Based on the SIPA Metrics and NBER data described here, sub-$500M fund size tracks with the outperformance LPs attribute to emerging managers more consistently than first-time status does, though this is an interpretation of the pattern rather than a claim any single cited source makes explicitly.

Related Coverage on AIN

• How to Vet an Emerging Manager's Debut Fund Before You Commit Capital
• Why Institutional LPs Don’t Pass on Your Track Record — They Pass on Your Sloppy Underwriting
• DPI Is the New Trust Signal for Emerging Managers

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.