Friday Letter: Raising a new fund has gotten easier – and harder

A new report shows debut funds rebounding after taking a big hit in 2020, but first-time funds face a very challenging market.

If you’re a first-time fund, don’t get too excited about a new report that shows debut funds rebounding after taking a big hit in 2020. Raising a brand-new fund is actually more difficult than ever.

“First they were hit by covid, now it’s too many damn GPs coming back too quickly,” said Kelly DePonte, managing director of placement advisory service Probitas Partners, which has helped more than 116 private fund managers raise more than $100 billion for VC, private equity and other funds.

“What you’re seeing in buyout, growth and VC is fund managers coming to market more quickly, especially in the past two to three years,” DePonte said, noting that funds are going back to LPs after just 18 months or even 12 months, which is throwing investors for a loop because they weren’t anticipating re-up requests for three or four years.

On top of the faster pace, GPs are frequently raising much larger funds, which makes it difficult for LPs that didn’t plan for such big increases, DePonte added.

Finally, LPs are trying to make sense of the market volatility caused by Russia’s invasion of Ukraine. It is not at all clear if recent market drops are temporary or if they will result in LPs being over-allocated to private funds. It is possible that the uncertainty will slow the overall pace of fund investing, DePonte noted.

All of this means that a first-time fund has to be really special for LPs to give it more than a passing glance.

Debut funds were hit hard by the pandemic, since most LPs insist on in-person meetings during the due diligence process. After raising a record $14.85 billion in 2018 and another $14.11 billion in 2019, North American VCs raising first-time funds were only able to scrape together $8.91 billion in 2020, according to PitchBook. North American first-timers came back strong last year, hauling in $14.58 billion.

The number of debut funds raised annually in North America didn’t change much due to the pandemic. There were 237 debut funds raised in 2018, 219 in 2019, 233 in 2020 and 207 in 2021, PitchBook said.

First-time venture funds in Europe were hit even harder than those in North America. They raised just $3.69 billion in 2020, after collecting $5.17 billion in 2019 and $3.19 billion in 2018, according to PitchBook. They bounced back with a record haul of $5.76 billion in 2021.

However, the number of first-time European VC funds fell dramatically last year, with just 56 new funds getting raised, down sharply from 98 in 2020, 83 in 2019 and 84 in 2018, PitchBook said.

DePonte chalked up the strong 2021 fundraising to LPs once again doing in-person meetings and also relaxed policies around meeting in person. For example, they might not insist on meeting in the flesh if they were approached by a spinout from a GP they had previously worked with.

Despite the high barriers to entry, new funds continue to launch. Our research team identified 13 US Fund Is that registered with the SEC from January 1 to March 8. So far they have collected about $315 million out of a combined target of at least $927 million.

Overall, 52 US emerging VC managers (Fund I through IV) have raised about $3.1 billion toward a combined target of at least $5.7 billion, our research shows.