Through May, first-time private equity managers raised $22.4 billion, a seven-year, post-global financial crisis record for the first five months of the year, according to a Palico analysis of the fundraising market. At the current pace, new managers will collect some $54 billion for the full year, or 32 percent more than the post-crisis high of $41 billion achieved in 2014. In 2008 – though the collapse of Lehman Brothers cut short the good times – first-time manager commitments hit an all-time record of $78 billion, equal to 14 percent of the $557 billion raised by PE funds.

Nearly all debut funds from new GPs in which LPs have invested since the financial crisis have equaled or outperformed the rest of their private equity portfolios.

Performance of Debut Funds

Source: Coller Capital Global Private Equity Barometer Summer 2015

Nearly Half of Capital Earmarked for Non-Traditional Fund Structures

So far, the sum raised by first-time managers in 2015 equals 12 percent of the $183.4 billion raised by traditional PE funds through the end of May. That compares to 9 percent for all of last year. But nearly half of the capital earmarked for first-time managers in 2015 – 48 percent – is slated for deal-by-deal, co-investment and managed account structures, rather than traditional funds. Before the financial crisis almost all new manager capital was committed to discretionary, commingled private equity funds. Even though the vast majority of new teams today are spin-outs from existing managers, they frequently must prove themselves by offering investments via more flexible structures before investors will back them in traditional funds.

Weakening Top Quartile Persistence, Low Cost and Specialization Add to Appeal

Weakening top quartile persistence for private equity managers – only an estimated 20 percent of top-performing private equity managers have back-to-back top-quartile funds today, versus over 40 percent in 20021 – is one factor reviving the popularity of first-time managers. Another attraction is the low cost associated with first-timers: their management fees are generally half the 2 percent charged by others and are frequently levied only on invested capital rather than on total commitments. New managers today are also more often than not specialists in particular niches. Specialist investing is popular given the common view that the generalist buyout field is overcrowded.

LPs are Increasingly Confident that they Can Successfully Vet First-Time Managers

A survey carried out by Coller Capital2 in the spring shows that over half of private equity investors have invested with first-time managers since the financial crisis and that nearly all of those investments have outperformed or equaled performance from the rest of those investors’ private equity portfolios. This finding is boosting investors’ confidence that they do, indeed, have the wherewithal to separate the wheat from the chaff when it comes to first-time managers.

Palico Helps Investors and Managers Connect

Today’s crowded marketplace – over 2000 general partners are currently raising capital – can make it difficult for promising managers to stand out and can overwhelm the resources of investors. By bringing the world of private equity to desktops and mobile devices, Palico makes the process of identifying and engaging with the best easier.

1 McKinsey & Company, Private Equity: Changing Perceptions and New Realities

2 Coller Capital Global Private Equity Barometer Summer 2015