Fundraising in the private equity industry follows a familiar tale: Bulge bracket investment firms enjoy easy access to capital, while first-time fundraisers typically find it challenging to hit their targets.
Exceptions do exist, though.
There are specialist managers that wrapped up their first-time funds in a relatively smooth process this year.
While there is no silver bullet for success, some of these debut funds supported their fundraising pitches by showing a proven ability to find deals and deploy capital quickly. Others offered co-investment opportunities or stood out as specialists with focused sector or regional expertise.
Small but swift
One example is Albion River, a Rockville, Md.-based PE firm that targets investments in the aerospace, defense and industrial sectors: Last month it secured $400 million for its inaugural fund.
The manager raised all the capital within 12 months, which is faster than usual, according to Ryan Schlitt, CEO of Aviditi Advisors, a firm that advised Albion on the fundraising. PE funds closed this year through the end of June took an average of 15 months to reach the finish line, according to PitchBook data.
Another case in point is Eagle Merchant Partners, an Atlanta-based boutique PE shop that operates in the Southeast, where PE capital is less concentrated. It closed its debut fund in July to invest in lower-middle-market companies in the consumer and industrial sectors after raising $265 million—well above its initial fundraising target.
The closes come as the fundraising market is more crowded than ever. It is even harsher for emerging managers and first-timers who haven’t established previous fund performance to raise capital.
During Q1 2023, PE emerging managers—defined as those who have raised less than three funds—had only raised $14.6 billion in equity commitments, while experienced firms took in $82.5 billion, or about 85% of all capital raised by PE funds, according to PitchBook data.
Deal-sourcing mavens
What led to these fundraising feats? A common strength among these emerging GPs has been their ability to show investors their prior experience sourcing deals and growing portfolio companies, said Aviditi Advisors’ Schlitt.
“A few critical attributes contributed to their successful outcomes,” Schlitt said. “These include the quality of the team and each firm’s track record as an independent sponsor having previously delivered outstanding results to their investors.”
Both Albion River and Eagle Merchant spent several years investing as independent sponsors before raising their first pool of capital. Independent sponsors, also known as fundless sponsors, source deals before seeking investors.
Stockton Croft, a founding partner at Eagle Merchant Partners, agreed. He said his firm’s fundraising success was also due to the fact that it swiftly deployed capital from the fund at the same time it was raising it. This gave investors an early look into its investment strategy and its ability to locate deals.
“It’s a very crowded fundraising market, and we had to prove ourselves,” Croft said.
Since Eagle Merchant held the first close for its fund in September 2021, the firm has already invested nearly half of the fund’s capital across six deals. Its targets have included Enviro-Master Services, a commercial cleaning franchisor; Puget Collision, an operator of auto repair shops; and Eskola Roofing & Waterproofing, a family-owned franchisor. It also did two bolt-ons to expand Eskola’s footprint, according to Croft.
New investors are often motivated to allocate to a first-time fund if they have a preview of the initial assets that will be in their pool of investments. This helps reduce the blind pool risk, and it’s especially effective at a time when the market is swamped with thousands of managers competing for investor dollars.
“It is an accelerant to the fundraising process,” Schlitt said.
The co-investment carrot
There are other tactics that could bolster GPs’ fundraising pitches and increase their chance of success, such as offering co-investment opportunities to allow LPs to participate in a deal alongside the GP with lower fees, Schlitt added.
Co-investments allow GPs to enhance existing LP relationships and forge new connections.
Allan Majotra, founder and managing partner at 5 Capital Funds Placement, said he had seen an LP participate in a co-investment deal with an emerging manager and later become an anchor investor in the GP’s successor fund because the deal performed well.
He further noted that some emerging managers could look for the chance to involve co-investors when their fundraising is slower than expected, or if they haven’t hit their fundraising target but still hope to execute on attractive opportunities.
GPs that have an industry specialization can also get a leg up over their peers.
Patient Square Capital, a healthcare specialist based in Menlo Park, Calif., closed its first fund at $3.9 billion in Q1 this year, representing over a quarter of total capital raised for PE healthcare funds year-to-date. PitchBook has reported that healthcare specialists have proven resilient in the realm of PE fundraising.
Investors can be more attracted to specialist managers with unique expertise or a sector focus compared with generalists, said Schlitt.
Related read: PitchBook’s Q1 2023 Global Private Market Fundraising Report
Featured image by © Marco Bottigelli/Getty Images
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