When it comes to fundraising, first-time private equity funds are a small part of the private equity universe these days, but the fact that some are successful at all in today’s competitive market merits taking a closer look.
Last year the trend in private equity (PE) fundraising was to invest in the largest and brand-name funds. The sheer number of PE funds closed was smaller than in the three previous years despite a similar overall amount raised. As a group, they hoovered up most of the USD 486 billion committed by institutional investors and limited partners, according to Preqin.
Despite fundraising’s “flight” to larger funds trend, 278 first-time funds still managed to raise USD 41.4 billion around the world in 2014. In response to a query about the trend this year by DealMarket Digest, Preqin analysts noted that compared to the same period last year closing activity for first-time funds is slowing, however 45% of the first-time funds that have managed to close so far this year have actually closed above their target capital, the highest proportion since 2008.
Clearly, there are already some new teams emerging that have captured the confidence of the group of limited partners who are willing to commit to new fund managers.
We asked Preqin for data on first time buyout fund to see emerging trends. Since 2010, there were 144 new buyout general partnerships (GP) to close first-time funds, with the number of first-time buyout funds increasing in the US and staying the same in Europe last year. Activity in all regions in recent years has yet to return to the levels seen before the bust of 2009. (See line chart)
Spinout Teams and Sector Specialization
Looking at industry news and analysis on the topic of emerging buyout teams, it is possible to see that spinout teams and specialization are some of the characteristics of successful fundraisings. In the US market, which by far has the largest number of successful buyout fundraisings, the first-time fund managers are not neophytes. They are typically “highly-skilled professionals with proven track records and deep industry experience”, often gained at larger more broadly focused funds, according to the latest outlook report from Cohn Reznick, a tax and accounting advisory based headquartered in New York.
Spinouts are able to show LPs a team that has worked together in the past, along with a strategy that fits the current marketplace, according to Alan Pardee, managing partner of placement agent Mercury Capital Advisors in an interview in Buyouts magazine. He says his firm is currently in fundraising with eight first-time funds, mostly spinouts.
Interestingly, one or two of those new US buyout teams formed since 2010 are already raising second funds. For example, Tengram Capital Partners, founded in 2010, announced closing its second fund this week at USD 320 million. It’s targeting middle-market brand-name consumer companies. And on the road with its second fund is Searchlight Capital Partners, also just a few years old. It aims to raise a USD 1.5 billion fund, after closing on USD 850 million in its first fund in 2013, according to PEHub. Searchlight’s founding team hailed from Apollo, Kohlberg Kravis Roberts, Erol Uzumeri, formerly of the Ontario Teachers’ Pension Plan. It targets “iconic” brands and consumer-touching industries.
In Europe, various kinds of private equity teams are emerging across the region. There are some that are targeting underserved geographic regions, such as Karma Ventures (backed by private investors and the Baltic Innovation Fund, an European Investement Fund-backed fund of funds with a geographic focus) and Tembo Capital, a London based PE team that invests in mining in Africa and other emerging markets. Others like, Agilitas, targets specific types of companies in the mid-market across Europe with a transformative strategy.
Institutional Investors Willing to Bet on New Teams
Some institutional investors have shown the ability to act like seed investors. For example, CPPIB backed a US-based spinout team, Kainos Capital, to invest in consumer and food industries, according to a report in Chief Investment Officer, while Global Endowment Management (GEM), based in Charlotte, backed another brand new mid-market player, Wheelhouse Capital Partners, specialized in healthcare and industrial services.
National banks and development banks are also seeding new teams, particularly mid-market and growth strategies. Some examples were recently cited in the FT include China Development Bank, Russian Direct Investment Fund, and BPI Bank (France). Furthermore, a number of high-profile limited partners have spoken publicly about backing emerging managers, such as Adveq in Switzerland and HamiltonLane, saying they will back first-time funds, but not first-time investors.
About a third of the limited partners’ in Preqin’s Investor Intelligence product, which tracks over 5,800 active investors in private equity, say that they will invest in first-time funds, a further 16% will consider them. Almost 40% will not even consider first-time funds. It is hard not to conclude that any new team that manages to make it to a close in a time of when private equity capital is flowing towards established and larger private equity teams has already overcome a competitive playing field. Now it’s time for them to run the next race, competing for opportunities and executing on their strategies.