In Private Markets, First-Timers Outperform Established Managers

First-time private capital funds have consistently outperformed more experienced managers in recent vintage years, according to Preqin.

Newly launched private equity, private debt, real estate, infrastructure, and natural resources funds achieved a higher median net internal rate of return than established counterparts in every vintage year but one between 2000 and 2012, the report stated.

Private markets investors who took a chance on a brand new fund were rewarded with “strong (and in some cases, exceptional) fund performance, increased portfolio diversification, and experience with niche strategies,” said Leopold Peavy, Preqin’s head of investor products.

Overall, investors have grown more likely to invest with first-time managers, with more than half of surveyed investors saying they would at least consider committing to a brand new private capital fund, compared to 39% in 2013.

As for the rest, 41% said they would not invest in first-time fund, while 11% said they would invest only in spin-offs of more established managers.

“Traditionally, first-time funds have faced difficulties when securing capital commitments from investors, due to the nature of traditional closed-end fund due diligence, which often relies on track record, firm, and investment history,” Peavy said. “Many investors do not feel comfortable committing such high levels of capital to unproven managers.”

However, with the majority of investors looking to maintain or increase their allocations across private equity, real estate, infrastructure, private debt, and natural resources over the long term, top-performing funds have become more difficult to access.

Around half of private equity, real estate, and infrastructure investors said it was harder to find attractive opportunities compared to 12 months ago, while roughly a third had the same sentiment about private debt and natural resources.

“As the marketplace becomes ever competitive,” Peavy said, “investors are growing more willing to commit to managers setting out on their first fundraising process.”  

Related: Why Manager Tenure Doesn’t Matter