Fundraising Environment is Difficult for First-Timers

North American capital consolidation is punishing first-time funds, according to Preqin.

The first-time funds are often managed by new or emerging managers and lag their peers in both fundraising and performance, according to Preqin. Series one funds are often three times, about $900 million, behind funds at the second series or later.

The fundraising gap between series one funds and series two and later funds has grown more over the past decade. “For some first-time managers, this fundraising gap may seem insurmountable,’ according to Preqin.

From 2008 to 2014, the volume of both first- and fifth-time funds closed in North America rose in tandem. They followed this trend until 2018. In 2017, maiden funds seemed to lose momentum, while mature funds picked up the pace. As of 2020, first-time fund closings declined compared to fifth-generation fund closings. This occurred at both the overall asset class level (a manager’s first fund in an asset class) and the fund series level (the first fund in a series of funds within a broader asset class).

While first-time pension funds are struggling to gain a foothold, there is still broader market demand. Using US public pension plans as a proxy for the market for private capital, Preqin found that the average target allocation to private capital was 30.7% for the 160 plans reported by the Public Plans Data. That was an increase from 28.7% in 2015 and represented $143 billion in added capacity over five years. Preqin compares this to asset allocation targets for global public equities, which dropped 2.5 percentage points and global public debt, barely increasing.

In many cases, Preqin says allocators are more comfortable allocating large amounts of capital to big-name multi-strategy managers like Ares. However, over the past 3.5 years, specialty funds and established managers stepping out of their lane have had the most success with first-time funds.

In 2018, Digital Colony Partners led specialty managers by closing its $4.1 billion Digital Colony Partners fund. In 2019, Elliot Associates and Bain Capital changed lanes and completed a buyout ($2 billion) and a real estate ($1.5 billion) fund, respectively.

As these more prominent players succeeded, Preqin says that smaller managers have had a more challenging time raising capital. “Those that have done well specialized or built on experience and reach to move into new waters, and are likely to be more the exception than the rule. Industry consolidation comes for us all and LPs are flocking to the big names they can be sure, or more sure, will hit their return targets,” according to Preqin.

CRE fundraising is also being hampered by the lagging effects of the pandemic.

Earlier Preqin reported that private equity fundraising for commercial real estate had a slow start to the year, with the number of funds reaching final close in Q1 more than halved to 52, securing $25 billion. Some 1,480 deals were completed with an aggregate value of $44 billion, representing declines of 24% and 44%, respectively, compared to Q1 2020.