First-Time Private Equity Funds Struggled to Raise Capital in Q1

Preqin finds investors are still more comfortable allocating to brand-name managers

The first quarter was not a good time to be a new kid on the private equity block.

Preqin, which tracks the private equity sector, said that 25 first-time funds secured an aggregate $5 billion in the first quarter, the lowest quarterly fundraising for the period since 2008.

This amount was just 5% of total capital raised by all private equity funds that closed in the first quarter, compared with 7% for funds closed in 2013 and 13% for funds closed in 2008.

Preqin said the first quarter result was worrying for the 641 first-time managers that were actively seeking to raise their first funds, targeting a combined $141 billion.

Investor appetite for first-time funds has also declined. Preqin said only 19% of investors its researchers interviewed in December were open to investing in first-time funds, down from 29% of investors in 2012.

However, 20% of investors in December said they may consider investing in first-time funds in the future, up from 6% the previous year, indicating potential for improvement in first-time fundraising figures.

Preqin’s new report found that 47% of first-time funds that closed in the first quarter failed to meet their target size, compared with 28% of funds raised by experienced fund managers.

Moreover, 64 private equity funds that were aiming to raise $34 billion were abandoned during 2013. Fifty-seven percent of these funds were being raised by first-time fund managers, up from 48% of abandoned funds in 2012.

Preqin noted that first-time managers typically spend slightly less time in market than experienced ones, largely because they are raising much smaller funds. First-time funds closed in the first quarter spent on average 16.7 months in market, compared with 17.6 months for all private equity funds.

Of the 641 first-time funds currently on the road, Preqin said, 242 had already secured an aggregate $25 billion toward their overall targets via interim closes. But that meant 399 had yet to hold an interim close.

Twenty first-time funds were targeting more than $1 billion.

Not all of Preqin’s news was bleak. It reported that several first-time funds have recently experienced fundraising success.

SwanCap Investment Management reached a final close in the first quarter on $1.2 billion 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,” Ignatius Fogarty, head of private equity products at Preqin, said in a statement.

“Investors still remain cautious toward allocating new capital to private equity funds and are more comfortable placing capital with larger, more experienced fund managers with a proven track record.”

Still, he said, some investors were willing to invest in first-time funds, particularly if they were better suited to their investment capabilities and needs, or offered 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,” Fogarty said.

 

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