How Tough is the Fundraising Environment for First-Time Funds? – January 2014

by Christopher Hardy

  • 27 Jan 2014
  • PE

Preqin’s Funds in Market online service shows that there are over 600 private equity funds currently being raised by first-time fund managers, seeking to raise an aggregate total of approximately $140bn. Of this number, 3% are targeting capital commitments equivalent to or greater than $1bn, compared to just fewer than 9% that are seeking to raise between $500mn and $1bn. Thirty-two percent of first-time funds in market are targeting less than $100mn. 

Despite the improving economic outlook in developing countries, first-time funds are still facing a tough fundraising environment. Not only is the ongoing trend of increasing regulation much more costly for smaller managers than it is for the large GPs, the more established managers seem to be dominating the market. In 2013, 103 funds closed on over $1bn in capital commitments, raising an aggregate of $306bn, equivalent to 65% of total capital raised by all funds. Only six of these funds were raised by first-time managers, totalling just over $9bn in overall commitments. Furthermore, the average fund size across the private equity industry has grown in consecutive years from a low of $344mn in 2010 to $555mn in 2013, with the greatest increase (38%) occurring between 2012 and 2013. This is indicative of the increasing dominance of large, established fund managers in the fundraising universe. 

A particularly telling statistic is that first-time fund managers that closed a fund in 2013 spent an average of 21 months on the road,a notable rise from the average of 19 months in 2012, and the low of 11 months in 2006. This does not bode well for the 622 first-time funds in market, of which 236 have managed to hold at least one interim close, collectively raising $23bn so far. 

There are currently five first-time funds in market each with a target of $2bn. These include three infrastructure funds and two buyout funds. The Bastion Infrastructure Fund seeks investments in low-volatility, cash generating assets primarily in OECD countries and is managed by the Bastion Infrastructure Group which was founded in 2012. DMC Partners I is a buyout fund managed by DMC (Developing Markets Capital) Partners, which was set up by three former Goldman Sachs executives. The fund will make investments in a variety of industry sectors in Sub-Saharan Africa, South East Asia, China and Russia. 

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