Currently 2nd Year Associate at a UMM fund with a high likelihood of promotion to VP. Funds have had good returns (2.5-3x MOIC over ~5 year hold period across their exits with many investments in structured equity etc.; funds are highly value oriented). Allowed to coinvest on a deal-by-deal basis and 70% back leverage at prime - 1.5%. I have $400k saved. What would you do?
Thank you all in advance.
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I would target an amount you are comfortable with in perpetuity. What is the minimum annual target and rules around changing your commitment over time? Without knowing the rules of the program it’s hard to say. Some funds won’t let you pick and choose or go up and down as you wish which changes how conservative you should be.
I think the main thing is that I would be on hook for the back-leverage if i left or didn't get promoted. Was planning to put a sizeable chunk and wait to buy real estate (maye like $350k) with some leverage (not sure how to optimize here given it gets expensive). $25k is the minimum commitment but I feel like this could turn into 7 figures if I was patient.
Would definitely want to understand what you’d be entitled to and on the hook for if you leave the firm. Would you be liquidated at the latest quarterly valuation? Would you be responsible for immediately paying off any leverage?
Would also keep in mind that if you’re promoted to VP, you’ll likely have a minimum fund level commitment. Would want to ensure you have enough cash on hand for that. Maybe some VPs can chime in here on what that looks like anecdotally.
Once that’s known, I’d imagine you average in across future deals the minimum amount (potentially more in deals you feel confident about) until reaching an allocation you’re comfortable with in your overall personal portfolio. No one can tell you what that number is, but it’s one you have to be comfortable with not seeing for the next 5-7 years. If your minimum investment is $25K, that means you could invest across the next 8 deals and only touch half of that $400k. Also, just general advice and an unpopular opinion for this forum, but I advocate for keeping a relatively high % (40-60%) in public markets, for liquidity and diversification reasons. A lot of your current and potential human capital is tied up in the fate of your firm, and thus public diversification relieves some of the stress that comes with that fact.
Anyway, after a year or two, you’ll be more certain of your future at the firm, seen more of the current uncertainty in PE exits stabilize (hopefully), and be more comfortable with your investments. Apologies for the book, but that’s how I’d approach it. Hopefully that helps.
bump
Sorry for the ignorant question but is the interest quarterly cash pay or PIK and only payable upon realization?
monthly cash pay. sucks. would get the leverage in a heartbeat if it was PIK and could be paid from distributions
That does suck. Do you have to use leverage?
Too risky for me
Also apologize for the somewhat ignorant comment, but what would this transaction look like? Assuming it’s a $10k investment into the deal, you pay out of pocket $3k and finance the rest of $7k at 1.5%. Then, are you paying $105 (1.5% of $7k) in interest payments each month until you realize a liquidity event for the deal in 3-5 years?
Think you probably pay $9 monthly no?
I think OP is saying the interest rate is prime less 150 bps (i.e., ~7%). Assuming simple monthly interest, you would pay $7,000 * 7% / 12 = $40.83 monthly until repayment, which is the liquidity event @NY_chimp describes. You then owe the principal balance prior to receiving returns on your equity.
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