US investors eye European first-time funds

The fundraising environment for debut funds proved positive in 2018, with €4.48bn raised across 35 European funds, according to Unquote Data. This is against 2017’s €5.25bn committed to 16 funds, including a €1bn large-cap vehicle (Core Equity Holdings). Notably, at least seven vehicles in 2017 and six in 2018 were backed by US LPs. The implication of this is that at least 30.5% of European first-time funds to have held a final close within the timeframe were backed by one or more US LPs.

Within the context of a European fundraising slowdown in 2018 compared with the previous year – €55.9bn raised across 72 funds, versus €84.6bn across 106 – an increase in the number of maiden funds and continued commitment by US LPs is particularly significant.

"European managers of first-time funds are surprised by the amount of US backing they can secure," says MVision CEO Mounir Guen. "US investors are very deep in number, have very mature programmes and are very comfortable with emerging managers."

A report by Cambridge Associates published in 2016 indicated the attraction some US LPs have to first-time funds. First, it suggested that US-based universities, foundations and other endowments that allocated at least 15% of their capital towards private investments – private equity, VC and distressed securities, real estate and others – achieved median returns of 3.6% for the 2015 fiscal year. This compares with the 0.9% returns obtained by those allocating only 5-15% of their funds to private asset classes. Second, around half of the 10 top-quartile private equity and VC funds with vintages of 2004-2012 were first-time or sophomore funds.

Familiar ground
Katharine Campbell, managing director at Cambridge Associates, underlines that alignment between GPs and LPs is generally more favourable in maiden funds, as the carried interest, rather than the management fee, is the greater economic incentive. She adds that sophisticated endowments and foundations have always been open to looking at first-time funds – in particular spinouts, where teams are already accustomed to working together.

"Today there is even greater appreciation of the importance of due diligence in this part of the market, given evidence that there is no shortage of risks backing more mature funds," says Campbell. "Family offices set up by entrepreneurial founders may also identify with first-time funds created by successful entrepreneurs with operating backgrounds, ideally paired with individuals with seasoned investment track records."

Belgium-based Core Equity Holdings’ €1bn maiden fund, focusing on large-cap investments, is mostly backed by university endowments based in the US. The GP’s partner, Thomas De Waen, says: "Our strategy allows for an investment period lasting anywhere up to 15 years and, as a result, we were looking to attract LPs with a certain size, which could commit for a longer period of time than that usually seen in private equity."

Today there is even greater appreciation of the importance of due diligence in this part of the market, given evidence that there is no shortage of risks backing more mature funds" - Katharine Campbell, Cambridge Associates

De Waen expands on why approaching endowments in the US was a logical move: "First, US endowments, who are established private equity backers in the region, have AUMs of up to €20-30bn. Second, US LPs are a lot more familiar with investing in GPs with long-term investment objectives than the European ones, especially as the practice is more established in the US. Finally, US LPs are generally more open to innovation and the due diligence process is completed really thoroughly. We feel as though we are backed by a relatively small group of like-minded LPs that understand our vision."

An industry source tells Unquote that one particular UK-based GP chose to concentrate its fundraising efforts for its maiden fund in the US, believing LPs in North America would be more inclined than their European peers to back a British manager while the outcome and consequences of Brexit remained unknown. The approach, they say, proved fruitful, and the GP successfully received commitments from North American pension funds, endowments and funds-of-funds.

Commenting on this particular fundraising, the source says: "US LPs were very receptive to the offer, despite the limited official track record. US LPs are, generally speaking, less risk-averse." The source added that due diligence by US LPs is completed even more thoroughly than in Europe, with multiple onsite visits, around 30 reference calls and days of interviews with founding partners organised. In the example highlighted, one LP that had never backed a first-time fund manager or a non-US-based GP chose to make a commitment.

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