Debut funds flourish in UK market

At the end of October, FPE Capital became the latest in a number of UK-based firms to have closed a debut institutionally backed vehicle. The firm held a final close for FPE II on its £100m target, 19 months after having officially launched as an independent investor.

FPE was the fourth venture or private equity house to have closed a maiden fund in H2 2017, with a further five having done so in the first half of the year. As a result, 2017 has already emerged as the busiest year for UK managers raising debut vehicles in the past six years. By comparison, 2016 saw five such fund closes, with seven in 2015 and three in each of the preceding three years.

Furthermore, a number of other firms are also on the road marketing their maiden vehicles. These include Epiris, which officially ended its contract as investment portfolio manager of Electra Private Equity in May, and Vaultier7, which became Europe's second female-led GP when it launched in September.

"There is currently a very buoyant fundraising market," says Janet Brooks, managing director at placement agent Monument Group. "At times like this, when LPs have slightly more capital to play with, they will be looking at their portfolio and thinking about what they would like to add. Many investors have quite mature portfolios already, and they might think it is worth taking a bit more risk at the margin and backing a first-time fundraiser."

The UK's largest first-time fundraise of 2017 to date has been by EMK Capital Partners, which closed on its £575m hard-cap in May 2017 after just eight months on the road. Meanwhile, in the lower-mid-market, Tenzing Private Equity held a final close for its first fund on its £200m hard-cap in January, after three months on the road, and Limerston Capital held a final close for Limerston Capital Partners I in excess of its £200m target in August.

You've got to be very brave and bold. It's an 18-24 month process in which you have no guarantee of success, so it is a big challenge" – Janet Brooks, Monument Group

This is partly because, in addition to LPs increasing their allocations, a number of new investors have begun committing capital to the asset class, explains Angela Willetts, managing director at asset manager Capital Dynamics. "It is quite difficult for some new entrants to get access to the established branded names because those firms already have a loyal base of investors," she says. "So they are perhaps looking for something a little bit different and new in order to establish a GP-LP relationship. If they can secure access from the start, they can build some fairly strong relationships with those new GPs, perhaps to a greater extent than they would be able to do with existing managers.

"There are also studies that show first-time fundraisers often outperform their more established peers," says Willetts. Indeed, a recent report by EY cites statistics that show funds raised by first-time managers between 2000-2015 generated an annual median IRR of 14.1% compared with the 10.2% generated by more established managers. Notably, lower target sizes is one of the key drivers behind the outperformance by first-time funds, as well as more "highly motivated" GPs.

Small is beautiful
Of the UK's nine final closes from first-time fundraisers this year, six have been for houses that target companies operating in the small-cap or lower-mid-market space. Two of these – YFM Equity Partners and Mobeus Equity Partners – were launched in response to UK regulatory changes to VCT funds that no longer enable them to make majority buyout invests. However, judging by the aforementioned report, it is not surprising that such a high number of these vehicles are managed by GPs operating in the smaller market segments; a space that is increasingly being vacated by established firms. Of particular note, Livingbridge held a final close for its latest fund on £660m in September 2016 – almost double the £360m raised for its like-for-like predecessor – while NorthEdge Capital's latest fund saw the GP raise £300m, a more modest increase of £75m compared to its predecessor.

"We are at a time in the market where lots of LPs' existing relationships are making the most of the amount of capital in the market by doubling their fund size," says Monument's Brooks. "Some investors are deciding that does not suit them and they would rather back somebody new."

Taking the plunge
In addition to the continuing demand from LPs for small-cap and lower-mid-market players, the move by some firms into larger deal sizes can also act as a catalyst and provide opportunities for some private equity professionals seeking new challenges. "There is a relatively large number of groups, particularly at larger buyout houses, where if you are a middle manager it is quite difficult to reach partner status," says Capital Dynamics' Willetts. "Some of these professionals might not want to drift into the larger deals and prefer to maintain that mid-market discipline. As a result, many are spinning out to form their own groups where they can perhaps be a bit more influential on their own success."

This factor was instrumental in the launch of Bregal Freshstream, set up by three former TowerBrook directors in 2015. Speaking to unquote" recently, as part of the In Profile series, Freshstream managing partner and co-founder Patrick Smulders said the GP's three founders left their former firm specifically because they wanted to return to lower-mid-market investing, which was where they had started at TowerBrook 10 years previously.

The current fundraising environment means many industry professionals are deciding to take the risk of launching their own firms, explains Monument's Brooks. "Anybody who is tempted to set up on their own but would normally be discouraged from doing so because of the challenges of raising a first-time fund might currently be more inclined to make the move," she says. "You've got to be very brave and bold. It's an 18-24 month process in which you have no guarantee of success, so it is a big challenge. But in this environment, where people can see there is more capital around and that other first-time funds are being financed, on balance it brings more people out of their current situations."

While many first-time fund managers are spinouts from more established firms, the backgrounds of GPs raising their first funds can take other forms, as Brooks and Willetts highlight. Whether they are family offices looking to increase their firepower, a collection of like-minded investment professionals launching a brand new venture, or a pure spinout from a larger firm, both Brooks and Willetts agree the key for LPs when backing new fund managers is that the senior team has a track record of working together.

"What we look for in particular is that the individuals – whether they have come from a combination of different managers previously or one background – have worked together in teams and that they have a performance track record," says Willetts. "It's important that their personalities fit. Sometimes you cannot always determine that until you get to the site visit at their offices and you can really see how they gel together as a team. And it is essential to really understand that track record, ideally by having it audited and signed off by their previous organisation."

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• Topics
• Fundraising
• UK / Ireland
• Capital Dynamics
• United Kingdom
• EY (Ernst & Young)
• Monument Group
• Tenzing
• Epiris
• EMK Capital Partners
• Bregal Investments