Blog

Are First-Time Private Debt Funds Worth It?

by Naomi Feliz

  • 14 Feb 2019
  • PD

As overall private debt fundraising levels have increased steadily in recent years, first-time fundraising has fallen to a six-year low. In 2018, just 35 first-time private debt funds held a final close, raising a total of $6.8bn in capital, the third consecutive decline from 2015’s most recent peak. First-time fundraising therefore accounts for 21% of the total number of private debt funds closed and just 6% of capital raised in 2018.

Further indication of a challenging market for first-time funds is the decreasing size of the average first-time private debt funds: in 2018, first-time private debt funds raised an average of $194bn, compared to $814mn for follow-on funds. Although this is just a slight decrease from $231bn in 2015, average size has consistently been falling over the past five years. However, first-time funds have nonetheless generated strong returns, consistently outperforming non-first-time funds for vintage years 2010 to 2015.

 

Key First-Time Private Debt Funds Facts:

  • First-time private debt fundraising activity has decreased consistently over the past few years, with 35 funds securing a total of $6.8bn in 2018 – the lowest level of activity seen since 2012.
  • In 2018, first-time fundraising activity accounted for 21% of the number of private debt funds closed and just 6% of capital raised. This is the fifth consecutive year that first-time funds have accounted for a falling proportion of funds closed.
  • While non-first-time funds have gotten bigger in recent years, the average size of first-time vehicles has steadily decreased. In 2018, first-time funds closed on an average of $194bn, marking the lowest average size in a decade.
  • First-time funds tend to take longer to raise than non-first-time funds. For funds that held a final close in 2018, first-time vehicles took an average of 17 months to raise capital, compared to 14 months for non-first-time funds.
  • First-time funds also had a lower fundraising success rate than non-first-time funds. In 2018, 58% of first-time funds met or exceeded their target, while 74% of non-first-time funds met or exceeded their target.
  • However, first-time funds of more recent vintages have generated stronger returns. For vintage years 2010 to 2015, first-time vehicles outperformed non-first-time funds.

Preqin’s Tom Carr, Head of Private Debt, commented: “The private debt market has notoriously been unforgiving towards first-time funds, as investors are wary of investing with a fund manager without a proven track record given their concerns about the current market cycle. As a result, first-time fundraising is falling further and further behind, and debut funds struggle to raise capital as quickly or as successfully as experienced managers. However, first-time funds are nonetheless uniquely positioned: many first-time managers are experts in niche strategies or geographies, and their performance can reward those who take chances on debutants. We’ve seen this in the performance of first-time funds, which tend to generate stronger returns than their more established peers.”

For more data on first-time private debt fundraising, please take a look at our factsheet or browse Insights for more of our recent research.

Sign up to our newsletter to ensure you are notified as soon as the reports are released.

Continue browsing industry reports, publications, conferences, blogs and more on Preqin Insights