New year, new firm

A confluence of factors could well mean we have started the year of the spin-out.

The new year often comes loaded with resolutions, goals and ambitious plans for reinvention. For some within the private equity industry this means more than just gym memberships and detox smoothies.

The team at fledgling mid-market firm Insignia Capital Partners is a case in point. As revealed by PEI this week, the San Francisco-based firm – founded by former dealmakers from Friedman Fleischer & Lowe and Lake Capital – closed its debut fund on $358 million. Having spun out and formed in 2012, the firm raised the bulk of its capital during 2015 with assistance from placement agent Sixpoint Partners.

According to market sources, current conditions have aligned to make first-time fundraising an increasingly viable prospect. As a result, the fundraising trail is littered with successful and ambitious spin-outs and start-ups. Examples include Boston-based Silversmith Capital Partners, which closed its debut fund on $460 million last September after a little over three months on the road, and Gamut Capital Management, launched by former Apollo Global Management senior partners, which is targeting $750 million to replicate Apollo’s strategy in the lower mid-market.

In Hong Kong, ADV Partners, which was founded by two former Mount Kellett Capital MDs, is currently investing the $545 million debut fund it closed in September 2015, and in Europe, Cairngorm Capital, a first-time fund founded by former HIG Capital partner Andrew Steel, expects to fully invest its £52.5 million ($79.7 million; €74.9 million) debut fund this year.

Of course the most significant driver of this trend is a benign fundraising environment that has helped firms across the board. According to PEI Research & Analytics, more than $384 billion was raised in 2015, down only slightly on 2014’s total. With significant distributions flowing back to LPs in 2015 (more than the $477 billion paid out in 2014, according to advisory firm Triago), it is unlikely that fundraising will slow.

LP demand is sufficiently buoyant, therefore, to support the right first-time funds; research conducted last summer by Coller Capital underlined this, reporting that more than 50 percent of LPs surveyed had recently invested in first-time funds.

The ‘pull factor’ of a strong fundraising tailwind is now accompanied by a number of ‘push factors’ compelling ambitious partners to go it alone, according to industry participants. For example, as large buyout shops morph into multi-strategy asset management businesses, individual teams can be left feeling orphaned and look to strike out on their own. Watch out for detailed analysis of this in our upcoming February magazine.

With all this new year fundraising fervour, it is important, however, not to get carried away. While the fundraising tailwind continues to blow, first-time funds still face substantial hurdles. As one placement agent tells PEI, there are definitely more investors who historically would say ‘no’ to debut funds that are now prepared to consider them, but “it’s still a very small part of the overall LP universe who will look at first-time funds”.

Traditional first-time fundraising rules apply; those who can’t tick all the boxes will struggle to gain momentum. For those who can, 2016 could be a transformational year. For more detail and insight on today’s fundraising market, download our recent special report, The Modern Fundraiser.