LP interest in first-time funds rises even as they concentrate portfolios: survey

The interest in first-time funds comes from LPs’ desire to build exposure to the US and European small and mid-markets.

With the private equity fundraising market slower than ever, it’s generally believed that those taking the biggest hits will be emerging managers, especially first-time funds.

It makes sense: as LPs slow commitments, they want to bet only on their trusted relationships that have delivered for them over many years. Committing to a new firm represents a risk that may be too much of an ask in today’s dislocated market.

Generally, LPs today are focusing on re-ups to their existing managers, not to mention culling the underperformers, rather than adding to their portfolios.

However, some good news for new managers: a fresh survey from Probitas Partners showed that LP interest in first-time funds remains strong, with the majority of interest in spin-outs of teams with experience working together.

Probitas’s survey, which included interviews with 70 institutional investors like pensions and endowments, found that 75 percent of respondents said they were focused on first-time funds formed through spin-outs. That’s up from 50 percent the prior year, according to Kelly DePonte, managing director at Probitas.

Investors also expressed strong interest in first-time funds formed by groups with attributable track records; launched by a team of experienced investors coming together for the first time; and new firms focusing on niche strategies, the survey said.

Only 2 percent of respondents said they’ve slowed or stopped looking for first-time fund opportunities in the current environment, the survey said.

While the sentiment in the survey is good news for new managers, it seems to contradict some other findings. For example, 67 percent of respondents also said they are focused on current GP relationships with only a limited look at forming new ones, with 8 percent responding they were only focusing on their current relationships and 3 percent looking to shrink their portfolio.

The explanation involves building out gaps in exposure to certain sectors. The interest in first-time funds comes from LPs’ desire to build exposure to the US and European small and mid-markets, DePonte said.

“LPs interested in these sectors always need to ‘refill the bucket’ as the most successful funds in these categories tend to raise much larger funds over time, in effect ‘sizing out.’ LPs’ need to select newer, smaller funds to refill those allocations,” DePonte said.

Indeed, the survey found that 66 percent of respondents focused the most attention on US mid-market buyout ($500 million to $2.5 billion). And 56 percent said they were focused on US small-market buyout (under $500 million).

A few first-time funds have been trying to attract capital from LPs in the tough markets, buffeted by inflation, rising rates, supply chain disruptions and geopolitical crises. Bansk Group is out targeting $1 billion for its debut, while Capitol Meridian, formed by two ex-Carlyle executives, is out raising its debut. Check out Buyouts’ extensive database of first-time and emerging manager funds for a complete rundown of activity.