Surveys suggest that only about half of all private equity investors will consider first-time funds. This is a bit of a conundrum, as many analyses of private equity returns have shown that first-time fund managers typically outperform established fund managers. Academic studies and well-recognized industry sources, such as Preqin, provide empirical evidence to support this view.
However, we are now learning that first-time managers may also offer lower risk than established managers. In this article published by PEI, the data aggregation and research consulting firm CEPRES finds that first-time managers have lower loss rates (5.1%) than second-generation (7.1%) and later funds. Intuitively, this probably makes sense as first-time managers are likely to be more risk-averse as they need to prove their success relative to those who have already done so. Interestingly, the article modestly contradicts the first-time fund outperformance claimed elsewhere.
However, CEPRES’s focus on risk-adjusted returns in private equity is admirable. And the CEPRES analysis, in conjunction with the outperformance claim of other studies, suggests that first-time fund investors deserve closer examination by all fund investors.