First-Time Private Debt Managers Struggle to Raise Money

According to Preqin, emerging managers tend to outperform more experienced peers – when they can find investors willing to bet on them.

Illustration by II

Illustration by II

Investors committed $110 billion to private debt funds last year – but only about $6.8 billion went to first-time managers, according to new data from Preqin.

It was a six-year fundraising low for new entrants to the private debt industry, the alternatives data firm said in a report Thursday. Just 35 debut funds reached a final close in 2018, down from a post-crisis high of 51 fund closings in 2015 and 2016.

Preqin said earlier this year that 163 private debt funds had closed in 2018, meaning that newcomers account for about 21 percent of the funds closed – and just 6 percent of the capital raised. Tom Carr, the data firm’s head of private debt, described the market as “notoriously” unforgiving to emerging managers, given investor concerns about their lack of proven track records.

“As a result, first-time fundraising is falling further and further behind, and debut funds struggle to raise capital as quickly or as successfully as experienced managers,” he said in Preqin’s statement Thursday.

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Preqin said first-time funds took an average of 17 months to raise capital – three months longer than the average established fund manager. Almost three-quarters of non-first-time funds met or exceeded their fundraising targets in 2018, but only 58 percent of funds led by newcomers could do the same.

And although private debt funds in general have been getting larger, Preqin said funds raised by emerging managers have been shrinking: The average first-time fund closed in 2018 raised $194 million – the smallest amount in a decade.

By sticking to proven managers, however, investors could be missing out on better returns: Preqin said that first-time funds raised between 2010 and 2015 have outperformed other private debt vehicles from those vintage years.

In the statement, Carr suggested that first-time funds are “uniquely positioned” to generate returns, thanks to their managers’ expertise in niche strategies or geographic markets.

“Their performance can reward those who take chances on debutants,” he said.