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First-Time Fundraising in Private Equity – August 2015

by Simon Li

  • 10 Aug 2015
  • PE

Entering the world of private equity as a first-time fund manager remains a challenging task. Since the start of the financial crisis, first-time fund managers have struggled to match the record levels of capital raised in the preceding years. First-time funds accumulated an aggregate $98bn from 433 funds and $97bn from 429 funds in 2007 and 2008 respectively. In the following years, first-time fundraising experienced a steep decline, both in terms of capital raised and the number of funds closed. In 2009, first-time funds raised 54% less capital through 163 fewer vehicles than the previous year, predominantly as a result of the financial crisis. These lower levels of fundraising continued into 2010 and, despite a brief recovery in 2011, reverted back to low levels from 2012 to 2014.

According to Preqin’s Funds in Market online service, first-time funds have raised $19.5bn from 99 vehicles in 2015 so far. This is behind the $24.4bn raised from 153 funds during the same period last year. Of the 99 funds closed this year, 42% have closed above their target size and another 20% closed at their target size. As the chart below illustrates, the proportion of first-time funds closing below their target sizes has been on the decline since 2012.

In terms of geographic focus, an increasing number of first-time funds are seeking to invest in North America. Of the 99 funds closed in 2015 YTD, 49% have a focus on North America, which is an increase on the average of just 38% for first-time funds closed focusing on North America in the five-year period from 2007 to 2012. 

Looking at the strategies of the first-time funds closed this year, 41% have been venture capital funds, the same proportion as in 2014. This is a large increase on the 31% seen in 2013, with venture capital now easily accounting for the largest number of first-time vehicles being raised, far ahead of the nine buyout first-time vehicles closed so far in 2015.

First-time fundraising is currently below the levels seen last year, yet first-time fund managers are, on average, closing above target more frequently. This is promising news for first-time fund managers, who are notoriously struggling to compete with the established names that are dominating the fundraising landscape and securing most of the LP capital. In the current bifurcated environment, first-time fund managers may continue to face tough fundraising conditions.

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