Raising an inaugural private debt fund for a new manager entering the alternative lending space remains a challenging task. Some institutional investors may still consider the asset class as a relatively new area of investment and as a result, may be more inclined to invest in more established firms with longer track records. However, the growing popularity of the asset class, particularly direct lending strategies, is potentially drawing in fund managers looking to exploit greater fundraising opportunities.
Preqin’s Private Debt Online database provides information on 380 closed first-time funds, and shows that since 2010 inaugural private debt funds have raised a total of $33bn in investor capital. But how successful have managers been in reaching their fundraising targets? The chart below shows the proportion of first-time private debt funds that have closed above, at or below target size since 2010. 2012 was the most successful year for first-time private debt fundraising, as over three-quarters of inaugural private debt funds closed above target. Although 2013 and 2014 saw a decrease in this level, the outlook for 2015 is cautiously optimistic as all first-time funds raised so far have closed above target.
According to Preqin’s private debt fund data, 36% of all first-time private debt funds which closed between 2010 and 2015 were direct lending vehicles. This is almost double the amount of mezzanine fund closures, the second most common strategy, and makes up 44% all funds currently in market (17% of which are first-time funds). It seems then that the direct lending space is providing fertile ground for first-time managers raising capital, exploiting demand for non-bank lending since the financial crisis.
Raising a first-time fund continues to be tricky across asset classes, and this is no different for those managers entering the private debt space. Competition for funding, and the best deals between managers and the banking sector all contribute towards the challenges faced by first-time funds. However, Preqin’s data shows that there is certainly a willingness among investors to allocate to first-time funds and so the future at the moment looks positive for would-be first-time managers.