Private equity fund investors have been favoring established buyout firms over first-time managers in recent months, as the challenges of carrying out due diligence remotely during the COVID-19 pandemic reduce their appetite for risk.
Out of the $127 billion raised by buyout firms between July and September, only $5.8 billion went to managers raising funds for the first time, the lowest level since 2013, according to industry data provider Preqin.
Some private equity fund investors said curbs on business travel were limiting their ability to familiarize themselves with new fund managers, and pushed them toward the relative safety of established players.
"It is definitely a higher bar in this environment because you can't have in-person meetings, you can't have a dinner with the manager, you can't really get to know the person," said Kelly Meldrum, head of primary investments at Adams Street Partners, a $41 billion "fund-of-funds" manager that invests in private equity funds on behalf of institutional investors.
In the third quarter of the year, Blackstone Group Inc, the world's largest private equity firm, closed its fourth real estate debt fund after collecting $8 billion from investors. KKR & Co Inc also raised $950 million for its second real estate credit fund.
Few first-time managers achieved the same. Among them were Andros Capital Partners, which closed a $250 million fund focused on the energy sector, and Benford Capital Partners, which raised $130 million to buy small lower middle market businesses.
About 55% of institutional investors view virtual meetings as effective only for preliminary talks, and not as a replacement for in-person due diligence, according to a survey by placement agent Probitas Partners. "The limitations on travel and meeting people have really made it much more difficult for first time funds in this environment," said Kelly Deponte, managing director at Probitas Partners, a fundraising advisory firm.
Overall, the private equity industry has held up against other asset classes during the pandemic. The Cambridge Associates private equity benchmark was up 10.34% in the second quarter, compared to a 20% rise in the S&P 500 Index during the same period, according to the latest available data.
As more investors feel emboldened by the private equity sector's performance, this could give them confidence to back first-time managers again, said Sarah Sandstrom, a partner at Campbell Lutyens, a fundraising advisory firm.
"It is incrementally getting a bit easier. We don't have that same element of fear around the public market valuations and performance that we did in March and April," Sandstrom said.