It’s always hard for a fledgling private equity firm to raise a debut fund, though LPs for the past few years have been more willing to explore relationships with first timers. This was a product of a strong fundraising environment and LPs flush with capital from distributions looking for returns in new places.

Last year, however, that environment changed, and raising a first-time fund became more challenging than it’s been for several years. LPs’ desire for first-time funds is expected to continue to diminish this year.

A total of 153 first-time private equity funds closed last year, with aggregate capital of $16.7 billion, according to Preqin. That is the lowest number of first-time funds closed since before 2005, the first year Preqin starting tracking first-timers.

For comparison, in 2014, 226 first-time funds closed on an aggregate of $20 billion. In fact, over 200 first-time funds closed in 2011, 2012, 2013 and 2014. Peak years for first-time fundraising tracked the overall private equity fundraising market, with 2008 leading the pack with 277 first-time funds closed with an aggregate of $41 billion.

Overall private equity fundraising slowed last year to $303.1 billion across 740 funds, Preqin said. That was down from the $333.9 billion across 915 funds in 2014. The peak was in 2007, when 967 funds raised $412.3 billion.

Big money

Although last year was tough, a few first-time funds enjoyed strong fundraisings. Silversmith Capital Partners, formed by executives from Bain Capital Ventures and Spectrum Equity, closed its debut fund last year on $460 million. Fund I beat its target by 30 percent and closed in just over three months.

Another firm that appears to be having a strong first-time fundraising is Gamut Capital Management, a spin-out from Apollo Global Management. Gamut launched in late August with a $750 million target and recently held a first close on about $500 million, according to a person with knowledge of the firm.

But that is not the typical experience for many first-timers. OpenGate Capital, which has been around since 2005, has so far raised about $300 million on its first institutional fund, which is capped at $350 million, according to an LP who is familiar with the firm. OpenGate began talking to LPs about the fund in 2014 (it’s not clear when it officially launched.)

For OpenGate, one LP who met with the firm wondered about the firm’s ability to invest the larger fund, after many years of investing in smaller deals. A spokeswoman for OpenGate declined to comment.

Other concerns LPs have with first-timers include transparency of track record, stability of team and the amount of time the partners have worked together, not to mention whether their stated strategy makes sense.

“I’ve never seen a first-time fund that says it’s easy out there; it’s not uncommon to take several years to get a first-time fund raised,” said Andrea Auerbach, managing director at Cambridge Associates.

Wave of re-ups

So why did LP interest in first-time funds start to dry up last year?

One explanation is the fundraising universe has become so large, first-time funds are facing intense competition for LP dollars, said Alan Pardee, managing partner and co-founder of Mercury Capital Advisors.

Compounding this issue for first-timers has been the appetite among LPs for strong-performing firms with so much demand they have to turn away investors. This became more pronounced last year when volatility started roiling the markets, pushing LPs further toward well-performing, established names, Pardee said.

“We’ve seen a bit of pullback on embracing risk as it relates to a number of different topics like China, first-time funds and commodities funds,” Pardee said. “First-time funds are harder today than they were in 2014 or 2013.”

Established managers are coming back to market sooner than anticipated to take advantage of the strong fundraising market, Auerbach said. “This [re-up] activity could have crowded out first-time fund activity, or certainly reduced it as a percentage of total commitments raised,” she said.

There is another factor in all this: Some managers have chosen to forgo traditional fund structures in favor of the fundless model. Placement agent Palico found first-time fundraising totals last year go way up when it counted non-traditional fund structures.

Palico found through September 2015, first-time private equity managers raised $45.8 billion — a seven-year, post-financial crisis record, according to David Lanchner, spokesman for Palico. Some 47 percent of capital for first-time funds in 2015 went to deal-by-deal, co-investment and managed account structures, rather than traditional funds, Lanchner said.

There is a movement by some GPs and LPs to reject the traditional fund structure, according to a source who works in the credit markets. LPs are doing it to avoid high fees, and GPs are doing it to focus on making deals rather than time-consuming fundraising.

Still, totally avoiding first-time managers is not a good idea for LPs, Auerbach said. Around half of the top 10 top-quartile firms from 1994 to 2012 were Fund I and Fund II, according to Cambridge research. “For those institutional investors that don’t do first-time funds as a matter of policy, you could be waiving the next top 10 top-quartile fund right on by your program,” Auerbach said.