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First-time funds look like risky investment prospects. Why does anyone invest in them?

From Almeida Capital: A large segment of our institutional client base is interested in first-time funds but a pre-requisite is that management teams must have quality experience. The key attractions are great returns and investment terms, which can be better than many of their more established competitors.

When looking at fund investing, potential investors must look at all the risks and first-time funds are no exception. In particular, investors must look at organisational issues, which is a concern commonly associated with a first-time group. The important point is to ensure that any additional risk is balanced by additional returns.

Quality experience
The name first-time funds can be misleading because it implies the manager has little or no investment experience. However, teams that manage good first-time opportunities should have significant experience that directly relates to the strategy. The ‘first-time' tends to refer to teams that haven't previously raised funds from institutions. Examples of first-time funds include:

· Firms that have previously raised money from high net worth individuals and are raising their first fund from institutional investors.
· Spin-offs/outs - captive firms or groups of individuals that have broken free from an established firm to raise money independently for the first time
· Experienced individuals coming together to raise their first fund

Better returns and investment terms
Assuming the experience of the team is appropriate, many investors believe that first-time funds will provide better returns because the managers are hungrier than those in more established funds. Their interests are better aligned with investors because their financial success will be dependent on future returns and not on management fees and carried interest from previous funds.

Investors are also likely to be offered better terms in the first-time fund as well as future offerings. First-time managers treat their investors like premier clients and are responsive in their communication. A common criticism of more established general partners is that they can be indifferent to investors' requirements.

Organisational issues
These issues tend to refer to the stability of the team as well as the firm's infrastructure. Team stability is often a concern because working together for the first time in a pressurised environment can often lead to problems and ultimately premature departures.

Setting up a first time fund normally means taking on a new infrastructure. Investors need to ensure that the firm has the resources to set up and manage the infrastructure effectively.

Almeida Capital is a private equity research and advisory firm based in Europe that works with a select number of 'next generation' private equity firms to help them with their strategy, marketing and fund-raising. It also manages AltAssets. For more information, please call +44 (0) 20 7242 8810 or visit www.almeidacapital.com.

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