Would love to hear folks' thoughts on learning experience in MM vs MF PE funds. When I say learning, I'm talking about thinking like an investor, learning how to make investment decision, technical analysis, qualitative analysis, etc.
At large MFs with buckets of associates, are you more or less a cog in the wheel / Excel monkey? I've heard that your experience is often very similar to that of an IB analyst where you're pigeonholed to specific workstreams.
I've talked to smaller MMs where I've been told you pretty much need to serve the role of asso and VP given how lean the teams are.
Any thoughts to this?
Also curious
I don’t know why this thought process has become so mainstream on WSO. It’s simply not the case given deal teams at most MF firms are just as lean, if not the same, as most MM firms. APO’s deal teams are Partner, Principal, and Associate. KKR’s deal teams are Partner, Director / Principal, Associate. BX is probably something similar where maybe you have one additional layer. Just because you go to a MF, it doesn’t mean you won’t partake in managing the 3rd party advisors or whatever else your diligence process entails. The one layer that you might get less exposure is capital markets (i.e., leveraged finance) b/c most of the larger firms have in-house groups that handle the financing, but I don’t know why doing that yourself at a MM would ever make you a better investor. Most MM firms are actually building this function these days as well. Contrary to popular belief, most MFs have industry verticals and they are generally pretty lean. Just look at those that have public websites with the team directory, you’ll notice most industry groups have 4-5 Associates max.
Curious why deal teams are so lean at MFs? It wouldn’t cost much for KKR/Apollo to increase the number of associates per team, but the benefits would be loud and clear. So why do they choose not to increase class sizes as fund sizes grow so much?
Almost by definition, MFs do (much) bigger deals than MM, not necessarily more deals. The need for more manpower doesn't really scale linearly with fund size.
Other underappreciated differences are in the (a) sophistication of the businesses and (b) types of businesses you look at and how that differs just as a result of size. This will affect what questions you ask and what you focus on. This is from someone who has only ever worked on the credit side of things, so take with a grain of salt. Personally it seems easier to move from large cap funds to smaller ones rather than the inverse in terms of skill set.
Mega fund / upper middle market: The businesses are large and sophisticated. They will typically have lots of data that can be analyzed. Diligence will be cutting that data and hiring third party advisors to make detailed reports covering every aspect of the business.
There is a big focus on understand the competitive landscape and where the company fits in the broader industry. What makes its products or services different? Why does it win? How much is the industry growing and how will the target’s market share change over time? Not all deals are roll ups, many are focused on using M&A to enhance the business (filling out product gaps, expanding geographies, etc) or introducing operational changes (new types of products, new ways of doing things) to drive value.
Middle market / lower middle market: The businesses are small and less sophisticated. You may have little if any data. Diligence will be less data / numbers driven and you may not even hire a consulting firm to do a market study if it’s a simple industry. The thesis for most deals is creating value through rolling up other players in the space (multiple arbitrage, cost savings, increased professionalization). You usually will not ask (or be able to get answers) to detailed questions about industry, competitive landscape, etc since the business will be some local goods or service provider (eg a plumbing co, a doctors practice, a car wash). The diligence / execution will focus on understanding the M&A opportunity and how to source acquisitions, ensuring the management team (usually founders) are competent and properly incentivized, making sure what you bought isn’t a POS (inflated earnings profile for some reason), and how to professionalize the business and integrate acquisitions.
This is overly simplistic but the large cap fund may be working on carving out the underperforming segment of some chemicals company and hire McKinsey and a gazillion other advisors to help understand what the business does and execute that while the small cap fund will be buying Bob Jones Plumbing with 10mm of EBITDA with the hopes of buying Joe Schmoe and Jane Doe plumbing and 12 other add ons before getting the platform to 50mm of EBITDA before flipping it to another sponsor. The work that goes into each is very different. With the former, you have to ask lots of detailed questions about the industry, competitive landscape, and the target and have data to answer those questions, while with the latter the focus will be on sourcing and integrating add ons.
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