Inside T. Bailey's Approach to Investing in Early-Stage Funds

Successful fund investing isn't just about selecting established names. This insight explores how T. Bailey identifies exceptional fund managers early in their journey, the rigorous due diligence behind every investment decision and why backing talented managers before they become widely recognised can create long-term value for investors.

Investors often use track record as a shorthand for quality, with three years seen as a credibility threshold. T. Bailey Asset Management, however, is prepared to invest much earlier, backing managers before launch and during their formative years when the opportunity is compelling.

“We’ve been willing to back early-stage funds pretty much through the life of T. Bailey,” says Elliot Farley, fund manager and CEO, who joined the firm a year after it was founded in 1999. “It’s not every fund and it’s usually where there is an opportunity that’s not already covered in the market, or we think the manager brings something different.”

Early success and building relationships

One of the first early investments Farley recalls was with Saracen Fund Managers, a Glasgow-based firm later acquired by Martin Gilbert’s AssetCo.

“We’re restricted in how much we can invest in a single fund, so we were capped at 25%,” he says. “As they gathered assets, we were able to increase our allocation, which did very well for us.”

The team exited after several years of strong performance.

Early backing has also helped T. Bailey build long-term relationships with managers. It was at Saracen that the team first met Julian Fosh, a manager they would later back soon after he joined the team on the Liontrust Special Situations Fund.

“Again, we invested when it was relatively small and that fund ultimately grew into the billions,” Farley adds.

Due diligence without compromise

While the funds themselves may be new, the managers behind them are often highly experienced.

“In 2025, we invested in a Hong Kong-based emerging market team called Merlin Fidelis,” says Ben Ridley, Head of Equities. “The two founders have each been in the industry for around 20 years.”

Experience does not reduce the level of due diligence applied. Managers and their strategies undergo extensive scrutiny before being considered for inclusion, often involving multiple meetings over many months.

“What I enjoy about this job is rolling up the sleeves and looking at the top 10 holdings in the portfolio, running equity analysis on those positions, and challenging their numbers and assumptions,” Ridley says. “It’s their job to persuade us they are more right than the market.”

Knowing when to exit

That scrutiny does not stop once an investment is made. The team remains vigilant and prepared to act quickly if performance falters or signs of style drift emerge.

“We backed Neil Woodford’s Patient Capital at launch in 2015,” says Farley. “We were told he was looking to raise about £200m and deploy it over something like three years. Thematically, there was a strong story there for us.

“He ended up raising £800m and we soon realised the capital was being deployed at a much faster rate than we had expected. We exited at a premium before issues emerged. It doesn’t always work out, but constant monitoring allows you to act quickly,” Farley adds.

The scale conundrum

Fund size can present challenges at both ends of the spectrum. T. Bailey was also an early investor in Fundsmith, which launched in 2010 and reached peak assets under management of £28.9bn at the end of 2021.

“With hindsight, we could have held on longer,” says Farley. “Terry Smith spotted a particular theme in the market for high-quality compounders, a strategy that became more crowded over time after many years of strong performance.”

Ridley adds: “The fund had high sector concentration being predominately overweight healthcare, consumer staples and consumer discretionary while avoiding technology, financials and industrials. That worked well for a long time until the pricing power underpinning those holdings started to get eroded by increased competition. Also, being underweight the technology space has not helped relatively, in this AI boom.”

Ahead of the AI curve

One fund that has excelled in this area – and in which T. Bailey was an early investor – is Polar Capital Artificial Intelligence.

“To date, the fund has managed to stay ahead of the curve,” says Farley. “I’ve yet to come across another team in the UK with the same level of knowledge and history when it comes to technology and AI.”

Ridley says: “If we asked people to name the top 10 stocks in the Polar Capital Artificial Intelligence Fund, most would, understandably but wrongly, list the FAANG stocks. The team recognised concerns around capex in large technology companies and shifted towards a more nuanced opportunity set, identifying how non-technology businesses can benefit from the cost and efficiency gains AI offers. Their hit rate in finding those beneficiaries has been excellent.”

Additional financial benefits

The primary benefit of investing in pre-launch or early-stage funds is growth potential. A less widely known advantage is founders’ fees.

In return for providing early capital, investors can benefit from reduced management and performance fees.

“Founders’ fees are never the reason we invest early, but they have the additional benefit of helping keep our cost structure down for our investors,” says Farley. “By backing strong managers early at a lower cost and locking that in, we can pass that advantage directly to our investors - which compounds meaningfully over time.”

What T. Bailey looks for in a manager

“You could have a full-time job just responding to all the emails we receive,” says Farley. “There are tens of thousands of funds, so there is no chance you can meet everybody. But occasionally, something just resonates with you: perhaps you see a particular email, it’s something somebody said or a comment made in the press, and you think there’s something we should investigate a bit further.”

For Ridley, managers who stand out tend to be “process-driven, with enough humility to cut or exit a position that is not working and revisit it further down the road”.

Farley looks for another key trait: hunger.

“When managers launch their own fund, they have everything to prove and a franchise to build. It may be their one opportunity, so it should be a period of intense focus to get the fund off the ground, raise assets and prove they can deliver on their strategy.

“If you think about the life cycle of fund management, it is probably the most compelling phase to invest alongside someone. So, if you’re going to back a manager at any point, that’s probably the time to go for it.”

If you are interested in learning more about the T. Bailey Asset Management team’s approach to investing, you can find out more by visiting www.tbaileyam.co.uk.