While every situation is unique, there tends to be a common pattern to how the PE industry rejuvenates. These days, new funds tend to take one of three forms:
Spinouts — Teams within established PE firms leave to raise an independent fund, which often stems from a desire to get back to one's roots pursuing smaller deals. Other times, spinouts follow a difference in opinion over firm strategy or fund economics. Either way, members of the departing team want to strike out on their own and control their own destiny.
Graduating fundless sponsors — Many other firms start as independent or “fundless” sponsors, investing on a deal-by-deal basis with the backing of family offices and/or more risk-tolerant institutional investors. This structure gives the team time to mature and jell as a group, and to build a track record off which to ultimately raise a more traditional blind pool.
New in-house strategies — Well-established PE firms might launch companion fund strategies following a period of robust firm growth that forces GPs to move up-market and abandon the segment previously occupied by their flagship strategy. Rather than leave their roots completely behind, general partners elect to launch a smaller fund to capitalize on their continuing deal flow with smaller transactions and provide opportunities for up-and-coming professionals. In other cases, they might raise dedicated sector funds, geographically oriented funds, minority growth strategies or even companion credit strategies.