By Luis Garcia

Private-equity investors are concentrating on larger and established firms, posing challenges for managers looking to raise their first fund.

The portion of private-equity capital flowing to first-time funds is shrinking, a trend that could make it more difficult for newly formed firms to get off the ground.

But not everything in the industry is bad news for first-time fund managers. In fact, they too seem to be taking advantage of the continuing private-equity fundraising boom.

First-time funds received $26 billion in capital commitments across 226 funds last year, compared with $36 billion across 283 first-time funds in 2016, according to a recent report from data provider Preqin Ltd. Those first-time funds represented just 6% of total private-equity fundraising during 2017, a decrease from 9% in 2016, the report said.

First-time funds’ declining share of the private-equity pie is in large part the result of an effort by many institutional investors to reduce the number of fund managers they back, industry executives say.

“LPs are aggregating more capital with fewer GP relationships, and subscale single-strategy managers are merging into larger platforms,” Michael Arougheti, chief executive of Ares Management LP, said during a conference call in mid-February to discuss the Los Angeles firm’s latest quarterly results. “I believe that these trends will only accelerate going forward.”

The private-equity industry, however, still has space for first-time funds that can offer investors an attractive option to diversify their allocations to the asset class—whether it is in a different region, sector or investment strategy, said Alan Pardee, managing partner and co-founder of capital-raising and investment-advisory firm Mercury Capital Advisors Group.

“LPs are capitalized and embracing risks in different ways,” Mr. Pardee said. “First-time funds still can be raised.”

Cove Hill Partners is one firm that raised its first fund based on an alternative strategy. The Boston firm, which closed its debut vehicle at slightly more than $1 billion last year, differentiates itself by being able to hold investments much longer than the typical private-equity fund, WSJ Pro Private Equity previously reported.

Even though established firms are grabbing a disproportionate share of the record levels of capital investors are pouring into private-equity funds, first-time fund managers do appear to be benefiting as well. First-time funds, for example, are increasing in size and raising capital faster on average, according to a Preqin press release related to the report. The release added that 73% of first-time funds that closed in 2017 met or exceeded their fundraising targets. In 2010, that proportion was 47%.

As long as private-equity fundraising remains strong, first-time fund managers likely will continue to get a lift. But with less capital going their way, those managers will have to make a bigger effort to stand out from the crowd and convince investors they are worth a shot.