- New GPs raised $26 bln across 226 funds in 2017
- Lack of track record, LP re-ups among obstacles
- 1st-time funds have tended to outperform since 2000
Last year was a blockbuster for private equity fundraising, but emerging managers continued to face challenges: Final closes by first-time funds fell 20 percent from 2016, data provider Preqin reports.
That drop reflects overall industry trends. With 2,296 funds seeking $744 billion — an all-time high — competition for LP commitments is fierce. Receiving record distributions, in excess of capital calls, many investors are sending money right back to existing managers. The result is increasing concentration of capital and fewer opportunities for the not-yet-established.
Still, first-time managers raised $26 billion across 226 funds in 2017. The latter number represented a quarter of all PE funds, a year-over-year increase. But as a proportion of aggregate capital, first-time funds were down three percentage points from 2016, to 6 percent.
The largest first-time fund to close in 2017 was Core Equity Holdings I, which raised 1 billion euros for European buyouts. In the U.S., Cove Hill Partners, founded by former Bain Capital executive Andrew Balson, pooled more than $1 billion for its debut, longer-duration vehicle. Both funds closed in September.
The average fund size grew for both emerging and established managers, coming in at $131 million and $660 million, respectively. That’s a 36 percent increase from 2010 for first-time funds, and a more than 400 percent increase for the rest.
Despite the relative difficulty emerging managers have raising money, their performance is typically superior. “First-time funds have higher median net IRRs than non-first-time funds across 10 of the 15 vintage years since 2000,” Preqin reports, “surpassing the net IRRs of all other funds by at least four percentage points for 2010-2012 and 2014 vintage funds.” Ranked alongside similar funds, 34 percent of first-time vehicles of all vintages were top-quartile performers.
This outperformance is not lost on investors, a third of whom “have expressed a preference for first-time funds.” But in keeping with the emphasis placed on track records, 41 percent of LPs won’t invest with first-time managers. And while one-fifth of investors intend to meet their entire allocations with re-ups, just 4 percent say they will commit only to new GPs.
While the search for strong returns should mean continued opportunity for emerging managers, these LP preferences will create significant hurdles. With 54 percent of investors planning to keep the same number of GP relationships over the next two years, and a further 11 percent looking to shed some managers, established firms are better positioned than new entrants to attract capital.
Maybe placement agents can help: 62 percent of first-time managers who used one and reached a close exceeded their target, while only 33 percent of those who went it alone were able to close above target.
Action Item: Check out Preqin’s 2018 Global Private Equity and Venture Capital report here.
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