First-time fund managers, particularly in the US, have suffered the most as a result of covid-19 restrictions that limited physical meetings, as LPs have instead focused on re-ups and allocating to existing relationships.
But that’ll likely change beginning this summer, as more in-person meetings are expected to resume in the US, and LPs and GPs are able to once again hold their pitch meetings face-to-face.
The good news for emerging managers is that it’s expected to be a busy summer as LPs and GPs are expected to come together in droves for in-person capital-raising meetups and other events.
“When I look back over the past 18 months, I think that the real factor that’s affected first-time interest in funds of all sorts is this lack of in-person meetings,” Kelly DePonte, managing director at Probitas Partners, told Venture Capital Journal. “But if you’re a US-focused, first-time VC fund, probably by the end of the summer you’re going to have more of an ability to meet LPs face-to-face and more of an ability to move the discussion along.”
Last year, only 87 managers in the US closed a first-time fund in 2020, according to PitchBook data. This was a significant drop from the 145 first-time managers that raised funds in 2019, and nearly half of the 162 first-timers in 2018.
Hesitation from LPs to meet with, much less invest in, managers without track records amid one of the worst economic downturns in recent memory is to be expected. But LPs’ interest in venture capital overall has increased significantly during the pandemic. According to a recent survey by placement agent Eaton Partners, 61 percent of LPs surveyed were eyeing further commitments, compared with the 41 percent that had given the same response seven months previously.
In addition to the pandemic impacting first-timer fund managers, competition from established firms raising record-sized funds, and often with accompanying add-on strategies, has filled up LP allocations.
2021 is the year for emerging managers
However, DePonte noted that it was difficult to continually allocate tremendous amounts of money to large VC investors. He said he expects emerging managers will have more success in 2021. He added that this year presents an opportunity for LPs to allocate to the other side of the market, where first-time funds are often smaller and outperform well-established vehicles.
“If you look at the history of first-time managers, first of all, there’s more volatility of returns,” DePonte said. “The spread between top-quartile and bottom-quartile first-time funds is larger for established funds.
“But when you’re looking at top-quartile returns, very often you’ve got strong top performance from first-time funds.”
This point was echoed in a pre-pandemic study by Cambridge Associates that showed new and developing fund managers in VC consistently ranking among the best performers in the asset class.
The pandemic and related economic turmoil have forced many LPs into their safe zone. However, DePonte said the re-opening of much of the economy this summer might present opportunities to back up-and-coming emerging fund managers: “Maybe what [LPs] should be trying to do, is try and find the next Sequoia Capital.”