First-time fundraising is ridiculously hard right now, for reasons that are fairly obvious. LPs don’t have a ton of money to spread around, and what they do put out is going to their best relationships.
The firms that lose out in that scenario are first-timers – those that don’t have the relationships with the investor community, or the track record of continued success, or even the infrastructure to show they are creating a franchise built to last.
But first-timers do have an advantage they will be able to reap over the next few years – it involves an area of vulnerability for many private equity firms. Smaller, newer firms have a vast ecosystem of large, established shops with lots of dry powder to sell assets to.
The value proposition for a new firm is the ability to buy a small company, grow it to a point where it’s out of their scope, and then sell it to a larger sponsor or a strategic buyer. Emerging managers are well positioned to take advantage of that cycle, which will become more significant as the economy slows and exits remain harder to achieve further up market.
That’s part of what is helping certain emerging managers attract capital even in this most stingy of fundraising markets. A smoother path to exit, not to mention specialization in a specific sector, or a particular strategy, makes a new firm more likely to have a successful fundraising.
A few firms have closed this year, including Prysm Capital, which raised $305 million for its debut pool targeting tech, consumer and healthcare. Prysm is an example of a firm that comes with a tight focus on sectors that the partners have specialized in for many years. Also, the three founding partners, Jay Park, Muhammad Mian and Matt Roberts, worked together at BlackRock before launching the firm – showing team continuity and stability.
Another first-timer that has successfully raised a debut fund is Hunter Point Capital, the GP stakes firm led by ex-GSO co-founder Bennett Goodman and former JC Flowers’ executive Avi Kalichstein. The firm has collected about $2.6 billion for its offering, an enormous amount for a first fund. Again, some of the dynamics that went into the fundraising success include a tight focus on strategy, and a strategy that remains fairly unique in PE – there are only a handful of shops that have raised money to pursue GP stakes investing.
Hunter Point has deployed capital across seven investments out of the fund already, which has showed investors as fundraising progressed the kind of deals the firm pursues and eliminated some of the “blind pool” uncertainty for later investors.
Even when a new firm is not able to show direct deal attribution, LPs can get a sense of how it will add value to their portfolio.
“What we really want to get a good sense of is what this investor is good at, what we’ve seen them be good at, their opportunities to add value – sourcing to value creation to exit – and have an understanding of that even in the absence of attribution,” according to a fund of funds executive who invests in emerging managers.
We’ll be exploring these issues in the June issue of Buyouts. Hit me up if you have thoughts on the challenges facing emerging managers and how some firms have navigated through. Also, if you have some thoughts on first-timers in the market now, let me know at email@example.com.