Corporate Financing Analysis - First-Time VC Fund Proving Their Popularity - 18 DEC 2017


With the highly competitive venture capital (VC) fundraising arena - where the number of funds in the market continues to increase, while the haul of unworked dry powder continues to rise to new levels - the need for fund managers to raise fresh funds is slowing with the combined value of fresh closes having fallen y-o-y in 2017 (to-date). Within this downturn ( see ' Trouble Up Ahead For Current Record VC Run ' , October 18 2017), however, BMI notes that there is one corner of the VC arena which continues to attract investment: first-time funds. Indeed, at a time when there appears good reason for a reduced level of fundraising - Preqin data shows that, as of April 2017, VC funds held a total of USD166bn in dry powder ( see ' PE Fundraising To Reach Record Highs In 2017 ' , May 31 2017) - we have continued to see a proliferation of fundraising closes at the riskier end of the VC spectrum.

Investors Willing To Take The Risk

According to Preqin data, there were 114 first-time VC fundraising closes recorded across the first nine months of 2017. BMI highlights that within this haul of deals, the size of the funds closed has varied greatly: from as large as Mubadala Capital Fund I's USD1.5bn fund, to as small as Cannonball Secret's USD1mn fund. While this represents a significant drop off in deal volume from the 201 debut-funds which closed during the 2016 full-year period, and sits below the five-year average of 203, such fund closes through to the end of 2016 represent a higher share of the broader market for VC fundraising closes globally in the y-t-d period. Indeed, debut funds accounted for 31% of all VC funds closed across the first nine months of the year, numbering 114. This represents an increase from a 25% share of the broader market by the end of Q316. So, why are new funds proving to be more resilient in the fundraising arena than their more established counterparts? Because they offer a more proven track record of higher returns - a factor likely to continue to increasingly appeal to investors as US economic growth disappoints going forward (our US real GDP forecast for 2018 of 2.1% is below the consensus of 2.3%). This potential of higher returns is unsurprisingly tempered by heightened levels of risk involved, but given the track record of returns which first-time funds have backing them, we expect investors to continue to take a bet on them going forward.

Down In Number, But A Higher Share
Annual First-Time VC Fundraising By Number Of Funds Closed
Source: BMI, Preqin

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