First-time funds and the deal-by-deal approach

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First-time funds are facing one of the most challenging PE fundraising markets in recent memory. LPs have slowed their pace of commitments and what they are allocating is going into the hands of the industry’s marquee names.

For GPs with no track records to speak of, it’s an environment that may feel unforgiving right now. Preqin data show that this year through to 20 September, only 232 debut PE funds managed to reach their final close globally, collecting $30.3bn from investors. This compares with 513 maiden fund closes through the whole of last year.

This puts 2022 on track to be the slowest year for first-time fundraises in nearly a decade: 2013 saw 398 such funds collectively close on $32.8bn.

Not only that, debut GPs are spending longer on the road. The average debut fundraise has taken 17 months in 2022, matching last year’s average schedule but overextending on the 15-month average in 2020. In 2019, it took 14 months to make it to the finish line.

It’s a tough slog but new managers have options. Securing initial capital on a deal-by-deal basis can be an effective way to get the ball rolling and build momentum. There are a host of reasons why managers might make this concession and there are advantages for both LPs and GPs.

For one, it only requires identifying a single deal opportunity, lightening the burden for the GP, and giving visibility to investors, who may be wary of committing to a long-term blind pool managed by a newcomer. That also means GPs are rewarded with carried interest sooner and without the potential for clawbacks since each deal sits in its own fund, rather than performance being averaged out across a selection of deals in one vehicle.

At a time when LPs are cautiously committing to private equity and paying close attention to their allocation levels, this piecemeal approach makes a lot of sense. Investors are more likely to want to dip their toes in the water than take the plunge. First-time funds should therefore give careful consideration to going this route and proving their worth, one deal at a time

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