Alternatives data provider, Preqin has published its Fundraising for first-time managers: A guide to raising capital report.
The firm writes that there are 3,421 private capital first-time funds in the market globally as of the end of Q3 2023, representing almost a quarter (24 per cent) of the total 14,461 funds. However, the lower average target size of first-time managers means the USD450 billion they are seeking to raise makes up only 13 per cent of the USD3.36 trillion total according to Preqin data.
By the end of Q3 2023, 269 first-time funds closed, or 17 per cent of the overall total of closed funds. But the USD38.8 billion raised by these first-time funds was only 5 per cent of the total capital raised during the same period.
This supports a trend in recent years in which first-time managers take a lower share of the total capital being raised, as a tough fundraising environment means fewer investment professionals are currently willing to spin out from existing teams to launch their own firms.
Key report facts:
Region: North America experienced a strong growth rate in the number of first-time funds closed and is the largest source of first-time managers, with 139 funds closed as of Q3 2023, compared with 44 in Europe and 41 in Asia.
Performance: Preqin’s performance data suggests that first-time funds do outperform. Preqin data showing the median net internal rate of return (IRR) of first-time managers for the 2020 vintage was 16.5 per cent for private equity while 21.0 per cent for private equity first-time managers, then 20.9 per cent for venture capital while 36.5 per cent for venture capital first-time managers. For those that do outperform, part of this may stem from the lower average fund sizes of first-time funds. This allows firms to deploy smaller amounts of capital into smaller capitalisation companies that are more likely to be overlooked by larger fund managers.
Preferential terms: Investors have a strong incentive to develop early relationships with emerging managers. For instance, early investors are in a prime position to negotiate favourable fund terms in return for early backing. Furthermore, allocating to first-time managers offers an advantage of improving the pipeline of potential deal flows available to LPs. Among the investors tracked by Preqin, there are 368 family offices open to investing in first-time managers, 279 for public pension funds, and 216 endowment funds, as of June 2023. Among Fund of Funds (FoFs) managers tracked by Preqin, 81 per cent are open to investing in a first-time private equity or VC fund, while 80 per cent of fund of hedge funds managers would be open to investing in emerging managers.
Cameron Joyce, SVP, Head of Private Equity, Research Insights at Preqin, says: “Raising capital in the current market landscape presents formidable challenges. These conditions disproportionately impact aspiring fund managers who are looking to launch their first funds. As private market investment programs mature and relationships with established fund managers settle, there can be a tendency to stick with the status quo meaning that differentiation is key in a market where it can be difficult to stand out.”
