First-time private equity fund managers commonly face challenges securing commitments from LPs due to the heavy emphasis placed on the particular characteristics attached to successful closed-end investment vehicles. Prospective investors typically prioritize a GP’s track record in terms of performance and the duration their investment team has worked together – both qualities that a first-time manager may be lacking.
Despite these challenges, first-time private equity fund managers have managed to amass $30.2bn in capital commitments so far, putting them on pace to surpass the $30.4bn raised in 2016. However, it is important to note that the capital is not as evenly distributed as it was in previous years. Over half (52%) of the capital committed to first-time funds this year has gone to the top 10 largest funds. This can be attributed to several of these first-time managers being investment arms of and/or supported by municipalities, state investment funds, big technology firms and insurance giants. In comparison, over the last five years (2012-2016) an average of 38% of capital raised by first-time managers was secured by the largest 10 funds.
The largest first-time fund closed this year so far is Guoxin Fund I raised by Sfund, a private equity firm formed by the Guangzhou Municipal. The fund will focus on buyout opportunities in China in the consumer discretionary and technology sectors. It is interesting to note that Asia-focused first-time funds have secured more capital to date than US-focused funds, having raised $12bn and $9.4bn respectively. These figures highlight the continued growth of private capital in Asia, and particularly in China.
Although the majority of capital has gone to these reputable “first-time” fund managers, it does not seem to have deterred smaller players: there are currently 705 first-time funds in market targeting an aggregate $282bn in capital commitments. Their optimism is not unwarranted as the majority (58%) of institutional investors interviewed by Preqin in June 2017 had a positive general perception of the private equity asset class. In addition, 35% of LPs surveyed planned to commit more capital to the asset class in the coming year than they did in the previous 12 months, compared with only 19% that planned to invest less. This is due in part to investors’ belief that private equity will continue to deliver high absolute and risk-adjusted returns. In addition, some of these managers, while unproven, may provide innovative or niche investment strategies that can help LPs increase portfolio diversification and, in some instances, reward them with strong returns.