E167: The Hardest Questions Limited Partners Ask GPs w/Stepstone’s Hunter Somerville
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What insights does Hunter Somerville offer on emerging managers?
Today, I'm very excited to welcome Hunter Somerville, partner at StepStone Group, a private investment firm with $179 billion under management as of end of year 2024. Hunter shares his insights on emerging managers, what makes VC successful in 2025, and how StepStone tracks performance at the individual partner level across 300 venture and growth managers. We'll explore StepStone's approach to spinouts, key metrics beyond simply DPI and TVPI, and leading indicators that a manager can build enduring venture capital franchise. Without further ado, here's my conversation with Hunter. Are emerging managers dead on arrival? For us, not at all. I think it will be a harder fundraising market for emerging managers, but there's so many different profiles of emerging managers to consider out there. I think for some, it will be much easier and more straightforward from a timeline standpoint. For others, more difficult. And I guess to break that down a little bit further,
For those that are leaving an established brand that have a very clear and fully attributable track record that have reached some level of seniority, we are seeing those fundraisers happen quite quickly. And I think the reason for that is LPs have realized they probably have too much exposure in groups that are larger in the multi-billion dollar kind of size range. and need to mix in and dollar cost average down with fund sizes that are probably more in the 50 to 300 million range. That being said, they're not in a huge hurry to go out on the risk curve and add managers that have never run organizations or have bodies of work that are more opaque or less clear. When you see someone leave an established brand and start a new organization that has done all of that, you know, sophisticated LPs that are active in venture move pretty quickly. And those fundraisers happen, you know, in very short timeframes.
Where I think emerging managers are in more jeopardy are when it's someone that's a mid-level person that's never run an organization, that has a body of work that maybe they sourced, but they didn't cover, they didn't sit on the board of, or operators that have never invested before. don't have an investment track record or have done very tiny angel checks that are just not indicative of their ability to execute as a lead or a number two in seed rounds going forward. So it becomes a bit of a have or have not story. The other groups that I think are in trouble are groups on Roman numeral, maybe two or three that have just not shown enough in their early body of work. There's these two conflicting memes in the marketplace. One is emerging managers are higher risk, higher rewards. A lot of emerging managers and fund to fund subscribe to that. The other one is, I would call it the David Clark Venn cap, which is we want to invest into all the traditional funds because even on a post-risk adjusted basis, they perform better than emerging managers.
Where do you fall on the spectrum? We don't believe in indexing venture as an asset class. And I think you have to be very picky among the spinouts. We look at all of them. We try to be informed and in front of all of them. We track all of their bodies of work and what they've done historically. So if a spinout happens, we come in with a prepared mind and have a point of view on whether We want to dig in further, but I would say not all are created equal. And even those that are leaving established brands and were general partners at those groups, some of those are regrettable churns where it was not someone that the organization wanted to maintain or keep and While it's a good brand and they had seniority, it's not something we want to do on a standalone basis.
And so we try to be efficient with that filtering and spend time where it's warranted. And even at the top firm, you have a wide variety of skill set within even a top firm. You mentioned that you have a prepared mind. You anticipate these spin outs. How do you get how do you keep a prepared mind when it comes to managers and what kind of metrics are you tracking?
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