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Is the First Close of a Private Equity Fund Important?

On average, private equity funds are taking longer to reach a first close, according to Preqin's Private Equity Spotlight - May 2013, but the proportion of capital secured by the first close has not increased to compensate for this, with 6% of funds that held a final close in 2013 securing more than 75% of their target by the first close.

So far in 2013, of the funds to reach a final close, 108 held an interim close. Thirty-two percent of these funds held a first close within three months, 28% reached a first close in four to six months, 18% reached a first close in seven to nine months, 8% reached a first close in 10 to 12 months, and 14% took more than 12 months to reach a first close. For funds that held a final close in 2012 that reached a first close within three months of launching, 59% went on to meet or exceed their target size. Of those funds that held a first close within four to six months, 58% went on to exceed their target size, while an additional 15% met their target. If a first close has not been reached within six months, funds are more likely to fall short of their final target. Over 70% of funds that took between 10 and 12 months did not meet their final target size, and 64% of funds that took over a year to reach a first close did not meet their target size.

The time taken to reach a first close varies considerably by fund type. The majority (64%) of buyout funds and distressed private equity funds (60%) that closed in 2012 held a first close within six months of being launched. For example, Advent International launched its latest fund, Advent Global Private Equity VII, in March 2012 and held a first close in July 2012 after securing €5.8bn towards its €7bn target. Just 33% of mezzanine funds that closed in 2012 held a first close within six months, while 44% spent over a year in market before reaching an initial close.

As Preqin Spotlight concludes, by examining funds closed in 2012, it is evident that the time taken for a fund to reach a first close can influence whether a fund goes on to meet or exceed its final target. For example, Ares Corporate Opportunities Fund IV secured $3.2bn towards its $4bn target by the time it held a first close in May 2012 and exceeded its target to close on its hard-cap of $4.7bn in August 2012. Reaching a first close quickly indicates investor demand, and therefore the fund is more likely to meet or exceed the final target, as opposed to funds that take a long time to reach a first close. As of the beginning of Q2 2013, there are 1,922 private equity funds in market seeking to raise an aggregate $793bn. Forty-six percent of those funds have spent 13-24 months in market so far, while a further 28% have spent over two years seeking investor capital.

Posted by Lisa Gan on 20-May-2013

Keywords: private equity, fundraising, first close