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Specialization, more experience fuel first-time fund outperformance: Pitchbook

  • First-time fund performance beats follow-on funds for 2012-2014 vintages
  • First-time fundraising continues to grow
  • Spin-out managers tend to have more experience these days

One of the biggest stories of the past few years has been the rise of first-time fund managers, including high-profile GPs who spin out of larger shops.

While first-time fundraising is on the rise, fresh research shows first-time funds across the globe are showing early signs of outperforming follow-on funds for the vintage years 2012 to 2014, according to Pitchbook. This is a change from at least one other era analyzed: follow-on funds outperformed first-timers for the 2003 to 2005 vintage years.

Before we get to the data, here is Pitchbook’s take on why recent first-time funds are showing better performance than follow-on funds:

“First-time funds are more likely to pursue niche strategies, whereas incumbent firms are raising increasingly large pools for generalist strategies,” according to Pitchbook’s report.

Also, “today’s first-time managers are more experienced than they used to be. Many of the investment professionals that strike out on their own now have plenty of experience at top-tier firms but also benefit from the greater motivation and focus resulting from having more skin in the game.”

The numbers

First-time funds from 2012 to 2014 vintages produced a median internal rate of return of 17.1 percent, beating the 10.8 percent median generated by follow-on funds for those vintages, Pitchbook discovered. Median cash-on-cash multiples for the 2012 to 2014 vintage years is 1.40x, compared to 1.19x for follow-on funds.

By contrast, first-time fund vintages 2003 to 2005 generated a median IRR is 8.2 percent, underperforming follow-on funds in those vintages by 200 basis points, Pitchbook said.

The numbers cover both realized and unrealized deals and are therefore subject to change. Pitchbook included buyout, growth, energy, restructuring/turnaround, hybrid strategies and mezzanine funds in its study universe.

First-time managers last year raised more than $14 billion across 36 first-time vehicles, accounting for 8.3 percent of fundraising volume, Pitchbook said.

First-time funds represented 9.8 percent of all fundraisings so far this year, Pitchbook said.

Alternative assets data provider Preqin also studies first-time fundraising. Preqin found that 170 first-time funds have raised $30.2 billion globally so far this year (as of early October). Last year, 260 first-time funds raised $30.4 billion, Preqin said. The peak year for first-time fundraising was 2007, when 291 first-time funds raised $43.3 billion, Preqin found.

Funds in market

Buyouts has been tracking first-time funds in market this year and is compiling a database of first-timers that have gotten a look by the limited partner community. Many of the most successful first-time funds raising capital this year include shops formed by well-known dealmakers.

The trick is, according to several sources, LPs need to know the partners and be familiar with their work to give a new shop a serious look.

One such firm, Gamut Capital Management, announced the final close of its debut fund on $1 billion, beating its $750 million target. Gamut was formed by Stan Parker and Jordan Zaken, who formerly worked together at Apollo Global Management.

Action Item: Check out the Pitchbook report here: http://bit.ly/2z72X9h

Money tap. Photo courtesy of alexsl/iStock/Getty Images