The latest statistics from Preqin’s Funds in Market online service demonstrates first-time fund managers are struggling to attract capital despite improvements in wider private equity fundraising. Has raising first-time funds been consistently testing for new fund managers, or are these difficulties a recent phenomenon due to the current economic climate and increasing regulations?
In 2014 YTD, $18bn in aggregate capital commitments has been secured by 99 first-time private equity funds, compared to $37bn of capital raised by 245 first-time funds by the end of 2013. These statistics suggest an increasing number of obstacles for maiden vehicles in the current fundraising environment, which is furthermore evident when the figures above are compared to the highs of pre-crisis first-time fundraising in 2007. In 2007, 419 first-time funds accumulated $96bn in collective capital, the highest amount recorded to date.
The number of first-time vehicles reaching final close and the amount of capital raised by these funds has steadily declined since 2009, and can thus be attributed to the austere fundraising environment due to the crisis beginning in 2008. The market has seen an increasing level of dominance by more established fund managers, consequently reducing opportunities for first-time fundraising. In 2007, first-time funds contributed 14% towards the total capital garnered by all private equity funds, as opposed to 7% in 2013.
The fundraising universe for first-time fund managers is also more challenging in 2014 than 2007 because of increased LP caution when investing capital; many investors prefer to lower risk by selecting fund managers with a proven track record. This wariness appears to be amplified in the post-crisis years. In 2007, 66% of first-time funds either met or exceeded the fundraising targets, compared to only 55% in 2013. Even more indicative of increased investor discretion is the 45% proportion of first-time funds that failed to meet targets in 2013. To date, Preqin is aware of 60 first-time private equity funds from 2012 to present that have been abandoned.
These statistics show the exacerbated troubles first-time funds face on the fundraising trail; the point of decline suggests this is a result of changing attitudes since 2008. Despite evidence of recovery of the private equity industry as a whole, the crisis considerably decreased investor appetite and especially narrowed the fundraising successes of debut vehicles. First-time funds face stiff competition from existing fund managers with a proven track record; accordingly, they must present themselves as an attractive alternative to their more established counterparts to secure greater capital commitments and reduce current bifurcation in the industry.