Who Will Build a Market Where Emerging Asset Managers Can Thrive?

Why supporting new firm formation is not enough—and why seed mandates, investor governance, market intermediaries, and Japan’s Emerging Managers Program all matter.

I recently gave a presentation at a closed-door study session attended by professionals from Japan’s securities and asset management industries. The question I was asked to address was why relatively few independent asset management firms are emerging in Japan—and what it would take to change that.

My central argument was that helping asset managers establish new firms is not enough. We also need to develop a market in which those firms have a realistic opportunity to grow after they begin operations. That requires looking beyond entry barriers to the governance and incentives of investors willing to provide initial investment mandates, as well as the market functions that evaluate emerging managers and connect them with potential clients.

Lowering Entry Barriers Is Necessary, but Not Sufficient

Establishing an asset management firm in Japan involves significant burdens. These include registration under the Financial Instruments and Exchange Act, recruiting qualified professionals, establishing internal control and compliance frameworks, and putting the necessary business operations and systems in place.

Having established an asset management firm myself, and now working in a position that supports the establishment and operation of emerging managers, I have seen more options become available for using external specialized services. In my view, the burden of moving from zero to one—establishing a firm and preparing it to begin business—has become somewhat lighter in recent years. Regulatory registration and internal controls remain substantial responsibilities, but founders no longer necessarily have to build every function entirely in-house.

Yet moving from zero to one is fundamentally different from moving from one to ten. Even if founders successfully complete registration and launch their businesses, building a sustainable asset management firm requires attracting client assets through investment mandates or fund investments. An investment professional’s track record at a previous employer can provide valuable evidence of ability, but the investment team, research resources, trading infrastructure, and operational responsibilities may all change after independence. Investors therefore need to assess whether the investment process and organizational capabilities underlying that track record can be sustained in the new firm, rather than assume that past performance will be replicated.

My concern is that a manager may succeed in establishing a firm but fail to secure sufficient client assets to grow. In that case, completing regulatory registration risks becoming the practical endpoint rather than the starting point of a viable business.

I often use an analogy from Japan’s major trading companies. They invest substantial resources and accept meaningful risks to send employees to South America, Africa, and other markets to develop new businesses because they see potential commercial opportunities ahead. Even if the cost and administrative burden of entering a market were reduced, there would be little reason to enter without an attractive business opportunity on the other side.

I believe the same logic applies to independent asset management firms. Without a market that offers a credible path from one to ten, including a reasonable prospect of business growth and economic returns, even highly capable investment professionals may find it difficult to justify starting their own firms.

The Vicious Cycle of Missing Initial Mandates

One of the greatest obstacles to growth is securing the initial client mandates and fund allocations that allow a newly independent asset manager to establish a track record and build a recurring revenue base.

A newly independent asset manager has little or no track record as a firm. Without that track record, it may struggle to win its first meaningful mandates. Without client assets to manage, it cannot build a substantial live track record. Limited assets under management also mean limited management fee revenue, making it difficult to reinvest in investment professionals, research capabilities, and organizational infrastructure.

This, in turn, makes it harder for the firm to demonstrate its capabilities as an organization and attract additional institutional clients. The result can be a self-reinforcing cycle: no mandates, limited track record, insufficient revenue, constrained investment in capabilities, and continued difficulty winning mandates.

By “initial mandates,” I mean more than an emerging manager’s first investment mandate or fund allocation. I have in mind the series of early client relationships and capital commitments through which a new firm builds a verifiable track record, generates management fee revenue, strengthens its operating capabilities, and establishes a foundation for winning further business.

Nor is growth in assets under management sufficient by itself. Fee levels, strategy capacity, investor-specific reporting requirements, and concentration risk arising from dependence on a small number of clients can all affect whether a larger asset base translates into a sustainable business.

What emerging managers need is not simply an inflow of capital. They need economically viable opportunities to demonstrate investment capabilities, earn sufficient revenue, and reinvest in the next stage of growth. Support for establishing firms cannot, by itself, break this cycle.

Investor Governance and Incentives: Who Can Make the First Allocation?

Breaking this cycle requires investors that can assess investment capabilities and provide initial mandates even when an asset management firm has only a short operating history.

This does not mean that pension funds, insurers, or other asset owners should allocate capital to emerging managers simply to support their development. Asset owners must prioritize the interests of their beneficiaries and other relevant stakeholders and select managers suited to their investment objectives. That responsibility must remain the starting point.

For an emerging manager, however, evaluation cannot rely primarily on a long corporate track record, a large asset base, or an established brand. It requires a more fundamental assessment of the investment professionals, investment philosophy, decision-making process, risk management, and organizational capabilities that may support future performance.

I do not believe the main problem is necessarily that asset owners lack the expertise to make these assessments. The more difficult question may be whether their organizations allow investment professionals to act on such assessments.

Selecting a large, established asset manager can be relatively easy to justify to an internal investment committee. The firm has a documented corporate history, recognized systems, and an established operating organization. Selecting an emerging manager generally requires more research, a more detailed explanation of the investment case, and potentially greater accountability if performance subsequently disappoints.

The benefits of discovering a talented new manager may accrue to beneficiaries and the institution as a whole. But if the additional workload, reputational exposure, and career-related risks fall disproportionately on the individual or department making the recommendation, selecting an established firm may become the more rational choice from that person’s perspective.

This is not a problem that can be solved simply by asking individuals to show more skill or courage. It is a question of institutional governance and incentive design.

Institutional leadership needs to recognize the value of identifying new investment capabilities, provide appropriate research resources and decision-making authority, and assess not only investment outcomes but also the quality of the decision-making process at the time a manager was selected. None of this requires indiscriminate allocations to emerging managers. A manager that does not fit an investor’s objectives should not be appointed.

The distinction is important: an institution may possess the expertise to recognize investment talent without having the governance structure needed to entrust that talent with capital.

Making Manager Evaluation and Investor Access Economically Sustainable

Improving governance within asset owners is necessary, but it is not sufficient. Japan also needs a deeper market for two distinct types of specialized services: independent manager research, due diligence, and evaluation on behalf of investors; and investor access and capital-raising support on behalf of emerging managers. These functions serve different clients and operate under different economic and incentive structures. For both to be available on a sustained basis, each must have sufficient demand and a commercially viable business model.

It is not necessarily efficient for every asset owner to carry out all due diligence, manager selection, and monitoring functions internally. Japan already has specialized providers, including pension investment consultants and gatekeepers that support manager evaluation and selection. Investors may also delegate certain evaluation and selection responsibilities to external specialists through discretionary investment management arrangements.

Yet the existence of these services does not mean that sufficient resources are devoted to identifying emerging managers. If institutional investors have little demand for emerging manager allocations, consultants and other specialists have limited commercial incentives to invest in the research staff and monitoring capabilities needed to evaluate firms without long corporate track records.

In other words, the issue may not be a shortage of people capable of evaluating emerging managers. It may be insufficient demand—and insufficient compensation—for the work of evaluating them.

This can create another feedback loop. Investors hesitate to appoint emerging managers, so demand for specialized evaluation services remains weak. Because those services remain underdeveloped, investors find it even harder to assess and appoint emerging managers.

There is also a distinct challenge on the manager’s side. Emerging managers must identify investors whose needs match their strategies, communicate their investment philosophy and capabilities, and convert those relationships into actual mandates. This requires expertise, time, and financial resources. Placement agents and other intermediaries may have a role in connecting managers with prospective investors.

However, investor-side manager evaluation and manager-side capital-raising support are different functions. They have different clients, economic models, and potential conflicts of interest. An investment consultant engaged by an asset owner is not operating under the same incentives as a placement agent engaged by an asset manager.

Placement-related services may generate transaction-based or ongoing compensation, depending on the arrangements. But developing investor relationships involves upfront costs, and the relevant activities may require regulatory compliance and conflicts-of-interest controls under Japanese law. The two functions should not be treated as interchangeable; each needs an economically sustainable model appropriate to its responsibilities.

A functioning market for emerging managers therefore requires three mutually reinforcing elements: investors willing and able to make well-founded initial allocations, independent capabilities for evaluating managers, and effective channels connecting asset managers with potential clients.

As more investors consider emerging managers, demand for evaluation and placement-related services can increase. As these functions improve, emerging managers may gain more opportunities to demonstrate their capabilities to potential clients. Building this reinforcing cycle matters far more than simply increasing the number of consultants or placement agents.

Could “Comply or Explain” Strengthen Japan’s Emerging Managers Program?

These considerations lead me to a policy proposal concerning Japan’s Emerging Managers Program, commonly known as the Japanese EMP.

The Japanese EMP is part of the government’s broader policy agenda to promote Japan as a leading asset management center. Existing initiatives include encouraging financial institutions to allocate capital to emerging managers, publishing examples of financial institutions’ initiatives, maintaining an entry list of emerging managers, and easing certain regulatory burdens associated with entering the investment management business.

Japan’s Asset Owner Principles also state that emerging managers should not be excluded from manager selection simply because they have a short business history. These are meaningful developments, and examples have emerged in which institutions use external gatekeepers to identify and select emerging managers.

Nevertheless, I wonder whether broad support for the policy objective of developing emerging managers is consistently translating into actual decisions to provide initial mandates.

Senior management at a financial group may support the EMP in principle, while the investment professionals and committees responsible for selecting individual managers face different incentives. Unless that support is reflected in research budgets, staffing, decision-making authority, and evaluation practices, it may do little to expand the market in which emerging managers can progress from one to ten.

I would therefore propose introducing a more explicit, voluntary “comply or explain” approach for financial groups and asset owners that support the objectives of Japan’s Emerging Managers Program. Japan’s Asset Owner Principles already apply this approach to institutions that adopt them. A similar framework for the EMP would focus not on whether an institution has allocated capital to a particular emerging manager, but on whether it has established and acted upon a credible policy for evaluating and considering emerging managers.

Under such a framework, institutions could be encouraged to disclose their policies toward emerging managers, the concrete steps they have taken to implement those policies, and the reasons for any lack of progress. This would go beyond highlighting examples of successful EMP initiatives. It would make more transparent whether publicly stated commitments are translating into actual management decisions, resource allocation, and changes in investment selection practices.

Importantly, this would not require institutions to invest in or appoint emerging managers. An asset owner may have entirely valid reasons for making no allocation, including the absence of suitable investment strategies. No investor should be expected to compromise the interests of beneficiaries in pursuit of an industry-development objective.

The objective would not be to demand explanations for rejecting individual managers. Rather, it would be to encourage institutions to explain how they approach the evaluation and selection of emerging managers at an organizational level. Have they established policies, allocated appropriate resources, and created genuine opportunities to consider emerging managers?

If progress has been limited, the reasons may differ. An institution may not have identified suitable strategies. It may lack specialist research capabilities. Or its governance structure may not adequately distribute the costs and responsibilities associated with selecting less-established managers. Each obstacle calls for a different response.

I see two potential benefits from encouraging such explanations. First, they could reveal gaps between commitments made by senior management and actions taken by the professionals responsible for investment decisions, prompting institutions to reconsider the allocation of resources and authority.

Second, they could help policymakers and market participants identify common obstacles across institutions. This would provide a better basis for determining whether Japan needs stronger manager evaluation capabilities, more effective channels connecting managers with investors, or other improvements to the market’s supporting infrastructure.

Confidentiality and the differing investment objectives of individual institutions would, of course, need to be respected. But encouraging concrete management action through transparency and accountability, rather than mandating investment allocations, could be a useful policy lever for advancing the Japanese EMP to its next stage.

From Supporting New Entrants to Building a Market for Growth

Developing emerging asset managers should not be measured simply by the number of newly established firms or completed regulatory registrations.

The real objective is to create a market in which talented investment professionals can rationally choose independence, have their capabilities properly assessed by investors, secure investment mandates and appropriate compensation, and reinvest the resulting profits in strengthening their investment organizations.

Achieving this requires more than lowering entry barriers. It requires investor governance and incentives that support well-founded initial allocations, commercially sustainable manager evaluation and investor-access services, and policies that encourage these elements to work together.

Japan has made progress in helping asset managers move from zero to one. The next challenge for its ambition to become a leading asset management center is to build the market that allows capable independent managers to move from one to ten.

The question is no longer only how to create more emerging asset managers. It is how to create the conditions in which they can grow.

Author: Keiichi Ohara, President & CEO, JAMP Corporation
About This Article
This article is an adapted English edition of JAMP Perspective No. 356, originally written in Japanese by Keiichi Ohara and distributed on October 28. It has been edited and supplemented where necessary to make the discussion and its Japan-specific context clearer to readers outside Japan. It is therefore not a direct translation of the original Japanese newsletter.

This article is provided for informational purposes only and does not constitute investment advice or a recommendation regarding any financial product.