Emerging PE managers - the performance question

According to Buyouts Insider, one issue that has haunted emerging managers trying to convince LPs to open their wallets -- how well do these early funds perform and is it worth the risk?

Preqin has an answer: It reviewed a sample set that spans 13 vintage years from 2000 to 2012, and found that 2004 is the only year in which non-first time funds outperformed first-time funds.

The 2012 median net internal rate of return hovered around 24 percent for first-time funds, and around 11 to 12 percent for non-first time funds, the private equity data provider said in a recent report.

This should be good news for LPs who are looking for some alternative to the more established firms that don't necessarily need their capital. And many LPs are looking for that alternative: 51 percent of more than 400 institutional investors surveyed in June 2016 will invest, or consider investing, in a first-time private capital fund this year. That is a 12 percentage point increase from 2013, Preqin said.

As well, 11 percent of LP respondents said they would invest in spin-out firms, up from 6 percent in 2013, Preqin said.

"Developing relationships with first-time or spin-off managers may be a pragmatic strategy for less experienced LPs looking to build out their portfolios and foster new GP relationships," the Preqin study said.

"For larger or more established LPs, committing to first-time fund managers can supplement their core portfolio funds with more niche strategies, potentially enhancing portfolio alpha through smaller funds, or establishing long-term relationships with up-and-coming investment talent," the study said.

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