First-Time PE Funds Out-Fundraised by Established Players in 2017

In a record capital-raising year for private equity, new funds were a quarter of the vehicles closed, but raised just 6% of the total in 2017. 
Reported by Larry Light


The tried-and-true triumph. Newly hatched private equity funds last year attracted a healthy $26 billion in investor funding, but because the PE industry is on a capital-raising tear, their share of the total dipped.

According to research firm Preqin, first-time funds accounted for a quarter of the PE funds closed in 2017. But in terms of the total amount raised, they corralled just 6%, down from 9% in 2016. While the average size of first-time funds has grown a little more than one-third since 2010, established funds have increased by a handsome 230%.

Overall, aggregate capital raised for private equity was a record $450 billion. Part of the allure for investors: Many expect 2018 to be a big year for mergers and acquisitions, an arena where PE always plays a star role.

Nevertheless, said Christopher Elvin, head of private equity products for Preqin, first-timers “face an increasingly competitive fundraising market and struggle to differentiate themselves and attract investors’ attention.” A significant amount of investors won’t commit to them, he said.

And ironically, Elvin pointed out, this comes despite the superior performance of fledgling funds. Preqin data show that first-time funds have posted better net internal rates of return—a key PE performance metric—on 10 of 15 years studied since 2000.

There is somewhat of silver lining: Some 49% of investors surveyed will consider investing in first-timers, the same as five years earlier. That said, the proportion of those saying they would shun the beginning funds during that period rose to 41% from 37%.