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Content Includes:Investor AttitudesPreqin Special Report:Making the Case for First-Time FundsNovember 2016Over half of LPs are opento investing in a first-timeprivate capital fund.OutperformanceFirst-time funds haveoutperformed funds ofestablished managers inevery year except one overthe past 13 years.Benefits of First-TimeFundsWhich LPs have hadsuccess selecting first-timefunds for investment?Opportunities forInvestorsThere are currently 863first-time private capitalfunds open to investment,collectively seeking 155bn.alternative assets. intelligent data.
Preqin Special Report: Making the Case forFirst-Time FundsDownload the data pack:www.preqin.com/FTF16ForewordFirst-time funds have traditionally faced challenges securing capital commitments from LPs due to the nature of traditional closedend fund due diligence. Most investment professionals (or their external advisors) with responsibility to vet these private capital*funds typically place significant emphasis on the GP’s track record, firm and investment history, and the duration of time for whichthe investment team has worked together. As closed-end funds are long-term and illiquid investments, many LPs do not feelcomfortable committing significant capital to unproven managers, especially as many of these first-time funds focus on diverseand innovative, yet unproven, investment ideas.Every top performing and “brand name” GP has had to raise a fund for the first time. Whether these first-time funds were teamsspun off from a balance sheet at an investment bank or insurance company, or individuals leaving a more established GP to starttheir own firm, there have always been LPs providing capital commitments to back these investment ideas. Many of the LPs thathave 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 totheir overall investment program.Covering areas such as first-time fund performance and fundraising, and with examples of LPs that have had success investing inthese new managers, LPs reading this report can expect a data-driven overview of first-time fund investing.We hope you find this report useful, and welcome any feedback you may have. For more information, please visit www.preqin.comor contact info@preqin.com.*Throughout this report, Preqin defines closed-end private capital as follows:Closed-End Private CapitalPrivate EquityPrivate DebtBuyoutDirect LendingVenture CapitalGrowthDistressed DebtTurnaroundMezzanineOther Private EquitySpecial SituationsPrivate EquitySecondariesVenture DebtPrivate Equity Fund ofFundsPrivate Debt Fund ofFundsReal EstateInfrastructurePrivate Equity Real EstateInfrastructureNatural ResourcesEnergyAgriculture/FarmlandPrivate Equity Real EstateFund of FundsInfrastructure Fund ofFundsPrivate Equity Real EstateSecondariesInfrastructure SecondariesMetals & MiningTimberlandWaterNatural Resources Fundof FundsContentsInvestor Attitudes towards First-Time Funds3The Outperformance of First-Time Funds4Benefits of First-Time Fund Investing6First-Time Fundraising Market - Opportunities for All Investors7All rights reserved. The entire contents of Preqin Special Report: Making the Case for First-Time Funds, November 2016 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmittedby any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in PreqinSpecial Report: Making the Case for First-Time Funds, November 2016 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of anyinvestment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd.responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: Making the Case for First-Time Funds, November 2016. While reasonable efforts have beenmade to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions containedin Preqin Special Report: Making the Case for First-Time Funds, November 2016 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does notaccept any responsibility for any errors or omissions within Preqin Special Report: Making the Case for First-Time Funds, November 2016 or for any expense or other loss alleged to have arisen in any way with a reader’s use of this publication.2 2016 Preqin Ltd. / www.preqin.com
Preqin Special Report: Making the Case forFirst-Time FundsDownload the data pack:www.preqin.com/FTF16Investor Attitudes towardsFirst-Time FundsFig. 1: Institutional Investor Views on the Difficulty of Sourcing Investment Opportunities Compared to 12 Months AgoHarder to Find AttractiveOpportunitiesEasier to Find AttractiveOpportunities47%6%Private Equity57%3%Real Estate54%4%Infrastructure28%14%Private Debt33%19%Natural ResourcesSource: Preqin Investor Outlook: Alternative Assets, H2 2016With nearly 7,400 unique institutionsconfirmed by Preqin as actively investingin private capital funds (see page 2 forfull definition), competition to accessfunds being raised by established, topperforming GPs is as intense as ever.Fig. 1 reflects the sentiment of over 400institutional investors polled in June2016 regarding the difficulty of findingattractive investment opportunities in theprivate capital industry. Competition toaccess the most established managersis set to intensify further; thousands ofinstitutions are currently under allocatedto private capital asset classes, and arelikely to be looking to put further capitalto work in the coming months and yearsto reach their target allocations (Fig. 2).The reality is, not every LP is going tobe able to access the largest and mostwell-regarded GPs. Large LPs withestablished in-house programs and amultitude of GP relationships will continueto gain access to funds managed by topperformers. However, some LPs maynot be experienced enough, some maybe too small, and some may lack therelationships needed to commit capital toa top manager; they may find this to be adifficult, and sometimes unrealistic, task.Developing relationships with first-timeor spin-off managers may be a pragmaticstrategy for less experienced LPslooking to build out their portfolios andfoster new GP relationships. For largeror more established LPs, committing tofirst-time fund managers can supplementFig. 2: Investor Attitudes towards First-Time Private CapitalFunds, 2013 vs. 2016100%10%20%30%40%50%60%Proportion of Investors20132016Source: Preqin Investor Analyst 2016 Preqin Ltd. / ces0%50%0%11%67%Private Debt5%Will Invest inSpin-offs %70%24%35%80%Real Estate56%Will Not Invest inFirst-Time Funds90%Private Equity20%17%Proportion of Respondents34%Will ConsiderInvesting inFirst-Time FundsThe willingness to look beyond theestablished managers and towards firsttime funds and spin-offs is evident inthe evolution of LPs from 2013 to 2016.Preqin data shows that, at present, 51%of LPs will invest, or consider investing,in a first-time private capital fund in 2016(Fig. 3), a 12 percentage point increasefrom 2013. In addition to an increasedwillingness to commit to or consider firsttime funds, 11% of LPs claim they wouldinvest in spin-off firms, up from 6% in2013.Fig. 3: Institutional Investors’ Plans for Allocations in theLonger Term19%Will Invest inFirst-Time Fundstheir core portfolio funds with moreniche strategies, potentially enhancingportfolio alpha through smaller funds, orestablishing long-term relationships withup-and-coming investment talent.Source: Preqin Investor Outlook: Alternative Assets, H2 20163
Preqin Special Report: Making the Case forFirst-Time FundsDownload the data pack:www.preqin.com/FTF16The Outperformanceof First-Time FundsFig. 4: Private Capital - Median Net IRRs by Vintage Year: First-Time Funds vs.Non-First-Time Funds25%20%Median Net IRROne of the key reasons LPs aroundthe globe have become increasinglyinterested in or open to including firsttime fund managers in their portfoliosstems from the historical performanceof first-time private capital funds. Preqindata shows that first-time funds notonly deliver returns comparable toestablished GPs, but many times theyoutperformexperiencedmanagers.Fig. 4 uses a sample set which spansacross 13 vintage years (2000-2012),and compares median net IRRs of firsttime funds against those of establishedfund managers. 2004 is the only vintageyear in which non-first-time funds haveoutperformed first-time 082009201020112012Vintage YearFirst-Time FundsNon-First-Time FundsTop Performing First-Time FundsThe following tables list the top performingfirst-time private capital funds. Six of thetop 10 performing first-time funds of alltime are classified as venture capitalfunds with mid-1990 vintages, possiblyrealizing these exceptional returns fromthe abnormal market conditions createdby the Tech Bubble (Fig. 5). Despite thehomogeneity of fund types depicted inthis initial list, both subsequent tables(Figs. 6 and 7) represent the diversityof top performing first-time funds acrosscriteria such as type, geographic focus,size and vintage year.Source: Preqin Private Equity OnlinePreqin Investor NetworkIf you are an institutional investor or other accredited investor, you can accessdetailed information on all alternative asset funds currently open to investmentfor free on Preqin Investor Network, which is used by over 7,800 investmentprofessionals worldwide.For more information, please visit:www.preqin.com/pinFig. 5: Top 10 Performing First-Time Private Capital Funds (All Vintages)Rank Fund1AMWIN Innovation Fund2Aravis Energy IFirmVintageCHAMP Ventures1998Aravis2009Fund Size(mn)TypeGeographicFocusNet IRR(%)DateReported42 AUDEarly StageAustralasia1,015.731-Dec-1447 -163Crescendo ICrescendo Ventures199513 USDVenture Capital(All Stages)4Morgan Stanley LeveragedEquity Fund IMorgan StanleyGlobal Private Equity198656 USDBuyoutUS279.730-Jun-165Auctus Fund IAuctus Management200338 s Ventures I7Columbia Capital EquityPartners I-A8Birchmere Ventures I9Nitzanim Fund (1993) Ltd.10Walnut Growth PartnersFocus Ventures1997106 USDVenture Capital(All Stages)Columbia Capital198973 USDVenture Capital(All Stages)US198.530-Jun-16Birchmere Ventures199612 USDVenture Capital(All Stages)US133.930-Jun-16Infinity Group199320 USDVenture Capital(All Stages)Middle East& Israel121.430-Jun-16THCG199730 USDVenture Capital(All Stages)US120.730-Jun-16Source: Preqin Private Equity Online4 2016 Preqin Ltd. / www.preqin.com
Preqin Special Report: Making the Case forFirst-Time FundsDownload the data pack:www.preqin.com/FTF16Fig. 6: Top 10 Performing First-Time Private Capital Funds (Vintage 2001-2005)Rank Fund1Auctus Fund I2Development PartnersFund3CDH China Fund3DP Fund4Resilience Fund I5Strukturfonden6Union Square Ventures7STAG Investments I (SCPGreen)8Ant Bridge No.19Platinum Equity CapitalPartners Fund IFirmVintageFund Size(mn)TypeGeographicFocusNet IRR(%)DateReportedAuctus Management200338 EURBuyoutEurope239.830-Jun-16DevelopmentPrinciples Group200579 USDGrowthAsia105.530-Jun-16CDH Investments2002102 USDGrowthAsia93.030-Jun-16Ocean Equity Partners200578 e CapitalPartners200226 USDSpecialSituationsInter IKEA Investments200110 EURTurnaroundEurope70.030-Jun-16Union SquareVentures2004125 USDEarly StageUS67.031-Dec-15STAG Industrial200450 USDReal EstateUS63.330-Jun-16Ant Capital Partners20032,500 JPYDirectSecondariesAsia59.230-Jun-16Platinum Equity2004700 USDBuyoutUS58.130-Sep-15Source: Preqin Private Equity OnlineFig. 7: Top 10 Performing First-Time Private Capital Funds (Vintage 2006-2013)Rank Fund1Aravis Energy I2Glilot Capital Partners I3Nordika IFirmVintageFund Size(mn)TypeGeographicFocusNet IRR(%)DateReportedAravis200947 EURInfrastructureEurope448.030-Jun-16Early StageMiddle East& Israel92.231-Mar-16Glilot Capital Partners201130 USDNordika201145 EURReal EstateEurope78.031-Dec-15US70.831-Mar-16Foresite Capital2012100 USDExpansion/LateStageLionBird201320 USDEarly Stage:Start-upMiddle East& Israel66.031-Dec-14EIV Capital200950 USDNaturalResourcesUS62.031-Dec-15Atlantic Street Capital200842 USDSpecialSituationsUS61.430-Jun-15Legacy CapitalLegacy Partners2011175 USDFund of FundsAsia58.530-Sep-149Courage CreditOpportunities Fund ICourage CapitalManagement200980 USDDistressed DebtUS54.930-Jun-1610Consonance CapitalPartnersConsonance CapitalPartners2013500 USDBuyoutUS52.930-Sep-154Foresite Capital Fund I5LionBird I6EIV Capital Fund I7Atlantic Street Capital I8Source: Preqin Private Equity OnlineInterested in Accessing Free Alternative Assets Data and Research Tools?Covering private equity, hedge funds, real estate, infrastructure, private debt and natural resources, Preqin’s ResearchCenter Premium is a free online service providing access to up-to-date charts and league tables, research reports andnewsletters, fund performance benchmarking tools and slide decks from recent Preqin presentations at conferences.All subscribers to Preqin Investor Network have access to Research Center Premium at no additional cost. For moreinformation, please visit:www.preqin.com/pin 2016 Preqin Ltd. / www.preqin.com5
Preqin Special Report: Making the Case forFirst-Time FundsDownload the data pack:www.preqin.com/FTF16Benefits of First-TimeFund InvestingOne key benefit of first-time fundinvesting is the potential to form strongLP-GP relationships over the longterm. These tend to lead to positiveoutcomes for LPs over time for a varietyof reasons, including the ability to committo successor funds that GPs raisebefore other LPs, seats on LP advisoryboards and committees, increased coinvestment opportunities alongside theGP, and sometimes more attractive andflexible fund terms and conditions.Two of the institutions with the mosttop performing first-time private capitalfunds as part of their portfolios, CalPERSand CalSTRS, have benefitted frominstituting in-house emerging managerinvestment programs. These emergingmanager programs not only focuson mitigating the risk of overlookingpotentially talented first-time managersdue to lack of track record, but alsoplace emphasis on investing in morediverse strategies and funds. Theseprograms enable LPs to allocate capitalcommitments to socially impactful fundsthat are often underrepresented in theprivate capital industry, such as minorityor women-owned funds.Successful First-Time Fund Selectionsubsequent fund offerings from theseGPs over competing institutions dueto the already established relationship.First-time funds can be beneficial fora variety of portfolios and investmentmandates. Of the 10 sample LPs listedin Fig. 7, there are six different typesof asset-owners represented: publicpension funds, private sector pensionfunds, endowment plans, funds of funds,insurance companies and foundations.Fig. 8 shows sample LPs that havebeen successful in their evaluation andselection of first-time funds. These LPshave been able to add several top- andsecond-quartile funds to their respectiveportfolios due to their willingness toinvest in first-time fund managers.LPs committing to first-time funds mayhave an advantage gaining access toThe diversity across LPs activelyinvesting in first-time closed-end fundsremains strong in the present fundraisingmarket. Fig. 9 lists five notable firsttime funds that closed in 2016, alongwith sample investors for each fund.These funds span a variety of sizes andfund types, and focus on a variety ofgeographic regions.Fig. 8: Sample Institutional Investors with Successful First-Time Private Capital Fund Selection*InvestorTypeNo. of Top-QuartileFirst-Time Funds inPortfolioNo. of SecondQuartile First-TimeFunds in PortfolioCalPERSPublic Pension Fund2934UTIMCOEndowment Plan197Pennsylvania Public School Employees' RetirementSystem (PSERS)Public Pension Fund1416Travelers CompaniesInsurance Company126Foundation114Public Pension Fund1112John D. and Catherine T. MacArthur FoundationCalSTRSMetLife Insurance CompanyInsurance Company117Oregon State TreasuryPublic Pension Fund1014Private Sector Pension Fund916PE Fund of Funds98AT&T Pension PlanAdams Street PartnersSource: Preqin Private Equity OnlineFig. 9: Notable Institutional Investors in Recently Closed First-Time Private Capital FundsFirmFundSize (mn)TypeGeographicFocusSample InvestorsBCP EnergyServices FundBernhardCapital Partners750 USDNaturalResourcesCanada, NorthAmerica, USLouisiana State Employees' Retirement System, Universityof Michigan EndowmentGeodesicCapital Fund IGeodesicCapital335 USDExpansion/Late StageNorth America,USBank of Tokyo-Mitsubishi UFJ, Development Bank of Japan,Mitsubishi Corporation, Mitsubishi Heavy Industries, SompoJapan Nipponkoa Insurance, Sumitomo Mitsui BankingCorporation, Toho BankLonsdaleCapital Partners110 GBPBuyoutEurope, UKLGT Capital Partners, Adams Street Partners, WilshirePrivate Markets1315 Capital203 USDGrowthN. America,USLos Angeles City Employees’ Retirement System, LosAngeles Fire and Police Pension System, Mount HolyokeCollege Endowment, Maryland State Retirement andPension SystemFundLonsdale CapitalPartners Fund I1315 Capital*Quartiles assigned in accordance with Preqin’s performance data and benchmarks; data points are based onknown LP portfolio commitments.Source: Preqin Private Equity Online6 2016 Preqin Ltd. / www.preqin.com
Preqin Special Report: Making the Case forFirst-Time FundsDownload the data pack:www.preqin.com/FTF16First-Time Fundraising Market- Opportunities for All InvestorsDespite the challenges faced by firsttime GPs in terms of receiving capitalcommitments from LPs, 158 first-timefunds have been able to hold a final closeso far in 2016. In terms of the currentfundraising market, Fig. 12 below showsthe largest first-time private capital fundsthat are currently seeking capital.Our Products and ServicesPreqin’s data and intelligence is available through a range of different mediums: With 863 funds currently open toinvestment, LPs looking to add first-timefunds to their portfolio will be able to findopportunities of all fund types, sizes andgeographic foci in the current first-timefundraising environment.Industry-leading online databasesPremium publicationsData feeds and APIComplimentary research reports, accessible through our Research CenterFor more information on how Preqin can help you, please contact:info@preqin.com2001515010100No. of Funds RaisingOtherNaturalResourcesReal EstateInfrastructureGrowthFund istressedPrivate Equity5Buyout50Aggregate Target Capital ( bn)35050300402502003015020100105000No. of Funds RaisingDiversifiedMultiRegional25020Rest 30No. of Funds Raising35400Fig. 11: First-Time Private Capital Funds in Market byPrimary Geographic Focus (As at October 2016)Aggregate Target Capital ( bn)450Aggregate Target Capital ( bn)No. of Funds RaisingFig. 10: First-Time Private Capital Funds in Market by FundType (As at October 2016)Aggregate Target Capital ( bn)Source: Preqin Private Equity OnlineSource: Preqin Private Equity OnlineFig. 12: 10 Largest First-Time Private Capital Funds in Market (As at October 2016)FundGeorgian Co-investment FundFirmTarget Size(mn)Fund TypeGeographic FocusGCF Partners6,000 USDBuyoutGeorgiaCivil Aviation InvestmentManagement Company20,000 CNYInfrastructureChinaGlorax Capital FundGlorax Group3,000 USDHybridRussiaPowering Australian Renewables FundAGL Energy3,000 AUDNatural ResourcesAustralasiaBastion Infrastructure Group2,000 USDInfrastructureEurope, Global, NorthAmerica, OECDPaulson & Co.2,000 USDDistressed DebtUS, West EuropeLippo Capital Advisors10,000 CNYGrowthChina, Far EastSummitview Capital10,000 CNYVenture Capital(All Stages)China, GlobalUK Green Investment Bank1,000 GBPInfrastructureUKQIC Global Infrastructure2,000 AUDInfrastructureGlobal, OECDChina Aviation Investment FundBastion Infrastructure Fund IPaulson Strategic Partners FundLippo Tsinghua Holdings FundSummitView IC Industry FundGIB Offshore Wind FundQIC Global Infrastructure FundSource: Preqin Private Equity Online 2016 Preqin Ltd. / www.preqin.com7
Preqin Special Report:Making the Case for First-Time FundsNovember 2016Preqin: Global Data and IntelligenceWith global coverage and detailed information on all aspects of alternative assets, Preqin’sindustry-leading online services keep you up-to-date on all the latest developments in thealternative assets industry.How does Preqin help Limited Partners?With almost 4,500 closed-end funds currently raising capital, navigating through the globalprivate capital fundraising market to identify the best and most attractive opportunities canbe a challenge for any investment professional.Preqin’s data and tools have been helping CIOs, portfolio managers and investmentanalysts with their private capital fund screening, first-step due diligence, benchmarking,market research, portfolio monitoring and evaluation workflow activities since 2003.Identify potential fund investment opportunitiesView in-depth profiles for all private capital funds currently in market, including informationon investment strategy, geographic focus, key fund data, service providers used andsample investors.Find active fund managers in alternativesView detailed profiles for all closed-end funds and managers active in alternativeinvestments. View information on key contacts, firm fundraising/AUM and performancehistory, key investment preferences, known investors and more.Compare yourself against your peersUse Preqin’s Investor Analyst service to compare your own asset class allocations,preferences, future plans and fund manager relationships against those of other LPs.Generate custom visual reports comparing your institution against a tailor-made peer group.Benchmark performanceIdentify which fund managers have the best track records, with customizable fundperformance benchmarks and performance details for over 8,200 individual named privateequity, real estate, infrastructure, private debt and natural resources funds.Examine fund termsSee the typical terms offered by funds of particular types, strategies and geographical foci,and assess the implications of making changes to different fees.Find out how Preqin’s products and services can help you:www.preqin.comIf you want any further information,or would like a demo of ourproducts, please contact us:New York:One Grand Central Place60 E 42nd Street, Suite 630New YorkNY 10165Tel: 1 212 350 0100Fax: 1 440 445 9595London:3rd FloorVintners’ Place68 Upper Thames StreetLondonEC4V 3BJTel: 44 (0)20 3207 0200Fax: 44 (0)87 0330 5892Singapore:One Finlayson Green, #11-02Singapore 049246Tel: 65 6305 2200Fax: 65 6491 5365San Francisco:One Embarcadero CenterSuite 2850San FranciscoCA 94111Tel: 1 415 316 0580Fax: 1 440 445 9595Hong Kong:Level 9, Central Building1-3 Pedder StreetCentral, Hong KongTel: 852 3958 2819Fax: 852 3975 2800ManilaPascor DriveSto. NiñoParañaque CityMetro Manila 1700PhilippinesEmail: info@preqin.comWeb: www.preqin.com 2015 Preqin Ltd. / www.preqin.com
First-time funds have traditionally faced challenges securing capital commitments from LPs due to the nature of traditional closed-end fund due diligence. Most investment professionals (or their external advisors) with responsibility to vet these private capital* . a top manager; they may find this to be a difficult, and sometimes unrealistic .
