What it takes to raise a first-time fund

Differentiation, a de-risked opportunity and deep operational resources are all required.

More than half of LPs plan to increase the number of GP relationships in their portfolios over the next 12 months, according to Infrastructure Investor’s LP Perspectives 2022 Study. However, this is unlikely to benefit emerging managers significantly.

The same proportion of investors have a ‘no first-time funds’ rule and a further 16 percent intend to invest less in first-time managers over the course of the next 12 months than they have over the past year.

Getting a new infrastructure manager off the ground is clearly no mean feat. And, of course, a global pandemic has not helped.

“It is always challenging for a first-time manager to raise a fund,” says Brent Burnett, co-head of real assets at Hamilton Lane. “But it has been particularly difficult over the past 18 months, when LPs have been unable to travel and meet new teams. LPs have felt comfortable re-upping with existing managers through covid, but far less comfortable forging new relationships without the benefit of on-site due diligence.”

To be successful, differentiation is key. “Investors have to have a reason to look at a new firm,” says Gordon Bajnai, head of global infrastructure at Campbell Lutyens. “That said, there are still instances of successful first-time fundraisings, particularly where a manager has a specific skill set or knowledge – for example around the energy transition or digital infrastructure. New specialist managers tend to be a lot more accepted than new generalists.”

Sector expertise

Tavneet Bakshi, partner and head of EMEA at FIRSTavenue, agrees. “It is a challenging environment for first-time funds,” she says. “But there is definitely more leeway when a manager has a particular sector expertise or thematic focus.

“For example, we are seeing infrastructure managers coming to market underpinned by an impact or sustainability angle. Similarly, LPs are going to be more lenient about early funds that feed into the energy transition or digital enablement themes.”

“There is also an opportunity for generalist funds that have a really disciplined focus on smaller deals,” Bakshi continues. “Investors recognise that mid-market players have expanded their fund sizes and are now operating at the larger end of the spectrum. They are interested in understanding who is going to make a difference in that smaller deal space. But even then, there will still be an emphasis on having an anchor investor or a pipeline of assets to de-risk the offering.”

Burnett adds that emerging managers also need to have invested in their organisation ahead of the fundraise, which can be hard to do. “They need to be able to go to market, not only with a fundraising and investment team, but also with a robust back and middle office. And they need to have an ESG and compliance capability. The days when a couple of individuals could raise lots of money in a first-time fund without that organisational infrastructure are long gone. They need to prove they are ready to manage institutional capital.”

Bruce Chapman, co-founder of Threadmark, emphasises the importance of having a track record that can be referenced. “Having access to an early source of capital to enable you to get a few deals done, de-risking the opportunity for other incoming investors, can also be useful,” he says.

Arjun Infrastructure Partners, for example, was founded in 2015 by JPMorgan Asset Management’s former head of European infrastructure, Surinder Toor. The firm invested on a club-deal basis with a group of around 20 institutional investors before closing its maiden fund on €1 billion in 2021.

There have been examples of successful spin-outs, including Asterion Industrial Partners, which was created by a trio of KKR executives, who closed their debut fund on €1.1 billion in 2019, before returning to the market to raise €1.8 billion just two years later. However, perhaps the more significant trend involves established managers launching new strategies.

“Some of the most successful first-time funds that have been raised over the past 18 months have been raised by established managers as an ancillary strategy,” says Chapman.

“We are seeing firms that have historically focused on value-add move to core, or else raise specialist funds around the energy transition, or go back to their roots with mid-market funds,” says Bajnai. Brookfield Asset Management launched a Global Transition Fund targeting $12.5 billion at the end of 2020, for example, while Antin Infrastructure Partners closed its maiden mid-market fund at its €2.2 billion hard-cap in June.