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Business News/ Companies / More investors open to backing first-time fund managers
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More investors open to backing first-time fund managers

During 2000-12, newly floated funds achieved a higher median net internal rate of return than all other funds in all but one year

Photo: iStockPremium
Photo: iStock

First-time funds in the private equity, private debt, real estate, infrastructure and natural resources sectors have consistently outperformed more experienced and established counterparts in recent years, according to data compiled by London-based researcher Preqin.

During 2000-12, newly floated funds achieved a higher median net internal rate of return than all other funds in all but one year (2004).

Overall, limited partners (LPs) are more likely to invest with first-time managers now, with as many as half the investors surveyed saying they would at least consider committing to a brand new private capital fund, compared to 39% in 2013. About 400 LPs across the world were surveyed.

The increased confidence in investing with first-time fund managers—largely break-outs or spin-offs from established funds—augur well for many such managers who are looking to raise money.

Vishal Kamalnain Bakshi, for example, has quit Goldman Sachs Group Inc. to set up his own private equity business called Avatar Growth Capital Partners. Heramb R. Hajarnavis, who leads the private equity practice at KKR & Co. in India, has quit to set up his own private equity firm. Sunil Theckath Vasudevan, a partner at home-grown private equity firm India Value Fund Advisors Pvt. Ltd, has quit to launch his own fund, targeting a corpus of $150-200 million.

This growing club of independent or entrepreneurial fund managers—those who broke away from their institutions to set up their own businesses—would qualify for first-time fund managers in the domestic context.

Whether these first-time funds were teams spun off from a balance sheet at an investment bank or insurance company, or individuals leaving a more established general partner to start their own firm, there have always been LPs providing capital commitments to back these investment ideas.

“Many of the LPs that have supported these first-time GPs’ initial investment strategies and talents have been rewarded with strong (and in some cases, exceptional) fund performance, increased portfolio diversification, experience with niche strategies and other factors beneficial to their overall investment programme," the report said.

While 41% said they would not invest in first-time funds, 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... As closed-end funds are long-term and illiquid investments, many LPs do not feel comfortable committing significant capital to unproven managers, especially as many of these first-time funds focus on diverse and innovative, yet unproven, investment ideas," the report added.

Despite the challenges faced by first-time funds in terms of receiving capital commitments from LPs, 158 first-time funds have been able to hold a final close so far in 2016.

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Published: 04 Nov 2016, 12:24 AM IST
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