Historically, first-time fund managers have had a harder time fundraising than their more seasoned peers, with Preqin’s 2016 Global Private Equity and Venture Capital Report indicating that just 8% of private capital raised in 2015 was by first-time fund managers. There are currently 281 US-based private equity GPs targeting an aggregate $31.4bn for their first vehicles, an increase in both number and value from the 212 first-time funds in market targeting $30.5bn at the beginning of Q2 last year.
Preqin’s Private Equity Online database contains detailed information on 518 US-based first-time private equity funds that have closed since 2010, the year which saw the lowest levels of first-time private equity fundraising activity from US-based managers: only $3.2bn was raised by 51 funds. First-time fundraising from US-based GPs has steadily improved since then, with 2014 seeing a post-crisis peak of 126 funds closed securing $9.3bn; however, this figure pales in comparison to the pre-crisis peak of 92 funds securing $19bn in institutional capital commitments in 2007.
In terms of strategy, 64% of first-time funds that have closed since 2010 have been venture capital vehicles, securing more than $13.7bn in institutional capital commitments. Despite accounting for only 16% of the total number, US-based first-time buyout fundraising has been relatively strong, with over $18.7bn committed to these vehicles in the same period. The largest US-based first-time fund closed since 2010 is BDT Capital Partners Fund I. Managed by BDT Capital Partners, the fund secured $3bn in 2011 and focuses on buyout investments in US-headquartered family-owned and entrepreneurial businesses.
As shown in the chart above, a growing proportion of US-based first-time fund managers have met or exceeded their fundraising targets since 2012. Following the financial crisis, US-based first-time fund managers experienced difficulties in fundraising, with around 54% of funds that closed in 2010 not achieving their targets. However, in line with better fundraising, the proportion of US-based first-time funds securing or exceeding their initial target has increased annually since 2012: 80% of US-based first-time funds closed in 2015 met or surpassed their target, up from 53% in 2012.
The use of a placement agent seems to have a positive effect on the success rate of an inaugural fundraise. Since 2010, 71% of US-based first-time private equity fund managers that employ the use of a placement agent have met or exceeded the fund’s target at final close, compared with 62% of funds closed without the use of a placement agent.
In an increasingly competitive fundraising market, some first-time fund managers look to increase their chances of a successful fundraise by adapting their offerings to attract investors, which includes charging LPs a reduced management fee, offering co-investment opportunities and committing more of their own capital to the fund to enhance the alignment of interests between parties. Some GPs may also opt to first invest on a deal-by-deal basis to demonstrate an ability to source and execute deals and to build a track record before seeking institutional capital. With more capital than ever before being sought by GPs, the private equity fundraising market is expected to remain competitive for first-time and experienced fund managers alike.