View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-and-Venture-Capital-Spotlight-February-2017.
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FIRST-TIME FUND MANAGERS
FIRST-TIME FUND MANAGERS Here, we provide an overview of first-time private equity fund managers, including fundraising, performance and investor interest, using data from Private Equity Online.
T he private equity industry continues
to grow as new entrants emerge and market their funds to investors. Strong Furthermore, there is a widening division between the average size of funds raised by first-time and established AVERAGE FUND SIZE ($mn): 2010 vs. 2016 564 investor appetite for the asset class as fund managers. Although historically well as recent high distributions have experienced fund managers have on encouraged LPs to invest large sums of average been able to raise greater sums 313 capital back into the industry in order to of capital than first-time managers, the meet their target allocations. Despite this difference has increased in recent years. demand, there are signs that the market The average size of a first-time fund closed 149 114 is bifurcating, making it more difficult in 2010 was $114mn, compared with for emerging managers launching their $313mn for non-first-time funds; for funds first fund as many investors seek out closed in 2016 the first-time average has established managers with a proven track increased to $149mn, whereas the average 2010 2016 record. Only 195 first-time funds closed size for established managers has jumped First-Time Fund Managers in 2016, the lowest number of emerging to $564mn. All Other Fund Managers funds closed since 2010, raising $25bn in aggregate capital (Fig. 1). There are other advantages to coming to PERFORMANCE market from an experienced position, as Although emerging manager funds have FUNDRAISING can be seen in the proportion of funds generally found it more difficult to attract The recent lower levels of first-time funds exceeding their target size. In 2016, 54% investor capital, they have tended to reaching a final close reflect a broader of closed non-first-time funds exceeded deliver better returns to investors. Fig. 3 trend in which fundraising by emerging their target size, with 23% coming in shows that first-time funds have higher managers as a proportion of the total under target; by comparison, only 35% of median net IRRs across most vintages private equity industry has decreased. first-time funds exceeded their target size since 2000, with a significant difference Where first-time funds made up 27% of and 30% fell short. Additionally, the need (of at least three percentage points) for funds closed in 2009, they represented to persuade investors of the benefits of a 2000-2003 vintage and 2010-2012 vintage 23% in 2016 (Fig. 2). Although the first-time fund and conduct the necessary funds. The outperformance can be seen proportion of capital raised by emerging due diligence means that first-time funds particularly in terms of quartile rankings: managers has varied, it has generally typically spend longer in market before when compared to similar funds, 31% of followed the same trend, with the 2016 reaching a final close: first-time funds first-time funds fall in the top quartile, with proportion (7%) lower than that of 2009 closed in 2016 had spent an average of 15 a further 23% in the second. (12%) and significantly below the recent months raising capital, compared to 14 peak of 20% in 2011. months for their established peers.
Fig. 1: Annual First-Time Private Equity Fundraising, Fig. 2: First-Time Fundraising as a Proportion of All Private 2009 - 2016 Equity Fundraising, 2009 - 2016 300 30% 27% 26% 243 25% 24% 250 25% 24% 24% 223 222 23% 23% 210 218 193 195 20% Proportion of Total
0 0% 2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016 Year of Final Close Year of Final Close No. of Funds Closed Aggregate Capital Raised ($bn) No. of Funds Closed Aggregate Capital Raised Source: Preqin Private Equity Online Source: Preqin Private Equity Online
3 Private Equity & Venture Capital Spotlight | February 2017 Preqin Ltd. 2017 / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-and-Venture-Capital-Spotlight-February-2017.pdf
FIRST-TIME FUND MANAGERS
Fund selection remains important, Fig. 3: Median Net IRRs by Vintage Year: First-Time vs. Non-First-Time Private Equity however, as there are considerable Funds differences between the performance of 25% first-time funds in the top and bottom quartiles, with at least a 10 percentage 20% point difference in median net IRRs for all
Net IRR since Inception
vintages except 2007 (Fig. 4). First-Time 15% Funds INVESTOR INTEREST Despite some investors reservations 10% Non-First- about first-time funds, there remains a Time Funds sizeable group of institutions interested in investing with emerging managers: 5% 30% of investors tracked by Preqins Private Equity Online have expressed a 0% preference for investing in first-time funds, 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013 with a further 10% that will only invest in spin-offs. An additional 17% will consider Vintage Year Source: Preqin Private Equity Online investing in first-time funds. However, in line with LPs recent views on the Some larger investors, recognizing the the road, seeking an aggregate $197bn importance of track records when sourcing potential benefits of exposure to new in capital commitments from investors. funds, the proportion of investors that will managers, go further in their backing of Although some investors have become invest in first-time funds has decreased new talent in the industry. California Public more cautious about allocating to new slightly from five years ago (Fig. 5). Employees Retirement System (CalPERS), managers, the potential benefits of for example, has developed an Emerging doing so diversification and higher Larger institutions are more likely to be Manager Program which supports early returns through identifying talented open to investing with first-time fund stage managers raising their first or second managers early, the opportunity to build managers than smaller LPs; while many fund with allocations of between $8mn a relationship that may help in gaining LPs recognize the potential for portfolio and $20mn. The pension fund announced access to successor funds and the diversification and higher returns in some in June 2016 that it plans to invest an favourable terms that some managers first-time funds, larger LPs are more likely additional $4bn via the program by 2020 offer to early supporters of their firm to have the internal resources necessary across all asset classes including private mean that other investors will continue to to carry out the additional due diligence equity, global equity and real estate, in be open to first-time funds and that there and also a private equity portfolio large addition to its $7bn investment in its new will remain opportunities for these fund enough to include exposure to first-time Transition Manager Program. managers to attract capital in the year fund managers alongside established ahead. firms. Sixty-five percent of investors with OUTLOOK over $10bn in AUM either currently invest Notwithstanding the challenges, new or would consider investing with emerging fund managers continue to bring vehicles managers; the figure drops to 50% for to the market: at the start of 2017, there investors with less than $1bn. are 654 first-time private equity funds on
Fig. 4: First-Time Private Equity Funds: Median Net IRRs and Fig. 5: Investor Appetite for First-Time Private Equity Funds, Quartile Boundaries by Vintage Year 2011 vs. 2016 45% 100% 40% 90% 35% 34% 30% Will Invest in Top Quartile Net 80% First-Time Funds 30% Net IRR since Inception
IRR Boundary 70%
Proportion of Investors
25% 10% Will Invest in 20% 60% 16% Median Net IRR Spin-offs Only 15% 50% 17% 10% 16% Will Consider 40% 5% Bottom Quartile Investing in First- Net IRR Boundary 30% Time Funds 0% 20% 43% Will Not Invest in -5% 35% First-Time Funds -10% 10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
