This figure equates to just 5% of total capital raised by all private equity funds closed in Q1 2014, compared to 7% for funds closed in 2013 and 13% for funds closed in 2008.
This is worrying news for the 641 first-time managers actively seeking to raise their first funds, targeting a combined $141bn.
Investor appetite for first-time funds has also declined – just 19% of investors we spoke to in December 2013 for our biannual investor appetite survey were open to investing in first-time funds, a notable decline from 29% of investors in 2012. However, 20% of investors in December 2013 stated they may consider in investing in first-time funds in the future, up from 6% the previous year, indicating there is a potential for improvement in first-time fundraising figures.
We have noticed the following fundraising trends:
- 47% of first-time funds closed in Q1 2014 failed to meet their target size, compared to 28% of funds raised by experienced fund managers;
- Abandoned funds – During 2013, 64 private equity funds that were aiming to raise $34bn were abandoned; 57% of these funds were being raised by first-time fund managers, up from 48% of abandoned funds in 2012;
- Time on the road – First-time funds typically spend slightly less time in market than experienced fund managers, largely as a result of raising much smaller funds. First-time funds closed in Q1 2014 spent on average 16.7 months in market, compared to 17.6 months for all private equity funds;
- Funds in market – As of April 2014, 2,116 private equity funds are currently in market, 641 of which are first-time funds that are seeking to raise $141bn. 20 first-time funds on the road are targeting over $1bn;
- Interim closes – 242 first-time funds on the road have already secured an aggregate $25bn towards their overall targets via interim closes. However, this means 399 are yet to hold an interim close;
- Notable funds – Although fundraising remains challenging for emerging managers, several first-time funds have recently experienced fundraising success. SwanCap Investment Management reached a final close in Q1 2014 on $1.2bn for its debut fund, SwanCap Opportunities Fund after less than 12 months on the road.
Despite private equity fundraising figures as a whole continuing to improve, it is undeniable that first-time funds managers face a tough challenge in attracting investor capital. Investors still remain cautious towards allocating new capital to private equity funds and are more comfortable placing capital with larger, more experienced fund managers with a proven track record.
Nevertheless, there are investors that will invest in first-time funds, particularly if they are better suited to their investment capabilities and needs, or offer diversified strategies. First-time funds can also be used as an alternative to the hard-to-access big brand names.
While the year ahead will remain difficult for first-time fund managers, those that offer a unique investment story and desire to succeed will be the most successful in securing capital commitments.
Ignatius Fogarty is head of private equity products at Preqin
