It’s always hard for a fledgling private equity firm to raise a debut fund, though LPs for the past few years have been more willing to explore relationships with first timers. This was a product of a strong fundraising environment and LPs flush with capital from distributions looking for returns in new places.
Last year, however, that environment changed, and raising a first-time fund became more challenging than it’s been for several years. LPs’ desire for first-time funds is expected to continue to diminish this year.
A total of 153 first-time private equity funds closed last year, with aggregate capital of $16.7 billion, according to Preqin. That is the lowest number of first-time funds closed since before 2005, the first year Preqin starting tracking first-timers.
For comparison, in 2014, 226 first-time funds closed on an aggregate of $20 billion. In fact, over 200 first-time funds closed in 2011, 2012, 2013 and 2014. Peak years for first-time fundraising tracked the overall private equity fundraising market, with 2008 leading the pack with 277 first-time funds closed with an aggregate of $41 billion.
Overall private equity fundraising slowed last year to $303.1 billion across 740 funds, Preqin said. That was down from the $333.9 billion across 915 funds in 2014. The peak was in 2007, when 967 funds raised $412.3 billion.
Although last year was tough, a few first-time funds enjoyed strong fundraisings. Silversmith Capital Partners, formed by executives from Bain Capital Ventures and Spectrum Equity, closed its debut fund last year on $460 million. Fund I beat its target by 30 percent and closed in just over three months.
Another firm that appears to be having a strong first-time fundraising is Gamut Capital Management, a spin-out from Apollo Global Management. Gamut launched in late August with a $750 million target and recently held a first close on about $500 million, according to a person with knowledge of the firm.
But that is not the typical experience for many first-timers. OpenGate Capital, which has been around since 2005, has so far raised about $300 million on its first institutional fund, which is capped at $350 million, according to an LP who is familiar with the firm. OpenGate began talking to LPs about the fund in 2014 (it’s not clear when it officially launched.)
For OpenGate, one LP who met with the firm wondered about the firm’s ability to invest the larger fund, after many years of investment in smaller deals. A spokeswoman for OpenGate declined to comment.
Other concerns LPs have with first-timers include transparency of track record, stability of team and the amount of time the partners have worked together, not to mention whether their stated strategy makes sense.
“I’ve never seen a first-time fund that says it’s easy out there; it’s not uncommon to take several years to get a first-time fund raised,” said Andrea Auerbach, managing director at Cambridge Associates.