Demand for debut funds grows

Spinout firms and overflow of LP demand have fuelled the debut fund market.

Debut funds are gaining ground so far this year, with first-time vehicles raising $10.2 billion in the first half of 2016, compared with $12.4 billion raised in all of 2015, according to PEI Research and Analytics
Firms starting out in the private equity industry tend to target smaller amounts of capital compared to more established managers as they work to build a strong reputation in the field, according to PEI Research and Analytics. But one of the debut funds that closed this year, Atlas Partners I, raised $1 billion in April, making it the largest inaugural fund to close in 2016 so far. 
It remains to be seen whether the total raised by debut funds this year will top 2011, which saw the highest amount of capital raised for debut funds in the past five years, with $33.4 billion raised from 140 vehicles. 
“LPs are more likely and keen to invest in first-time funds these days because they are being cut out of the more established, larger funds,” Eric Zoller, founder and partner of Sixpoint Partners , told Private Equity International. “LPs are having an increasingly tough time entering sought after funds, irrespective of size.”
Though it's important to note that not all investors will consider a first-time fund since they need to be familiar with the structure and terms of a fund, and make sure they are positioning themselves in the market appropriately, he added. Dynamics around positioning for a first-time fund are very different compared with an established group, when an LP will have full access to the track record of the general partner's previous funds.
Debut funds have proliferated in recent years for several reasons. Existing private equity firms are increasingly making succession plans when founders near retirement age and a new generation of fund manager typically takes over, but those that do not have a formal succession plan may see the next generation of partners in the group venture out on their own and launch new funds, Zoller said.
Zoller noted that the number of debut funds has also picked up due to the continued growth of multiple strategies and assets held by the mega funds. “It's a driver because as these firms diversify to new strategies and raise a number of funds across multiple assets, one of those strategies becomes more orphaned,” Zoller said, adding that part of the team may spin out to better fulfill the strategy.
For LPs considering whether to invest in a first-time fund, Zoller added that references have become a critical element, as well as the past experience of the team.