Best path to start a PE fund

I've seen a ton of different paths, from MD-level bankers, to VP/Principals at upper MM / mega funds, etc. Some guys start as a fundless sponsor to build a track record. Some guys have left c-suite / upper management at strategics to start funds. Really one of those things where people come from a variety of backgrounds to found something so it's hard to answer.

In terms of differentiation, another tough one to answer because there are a lot of factors, but usually a combination of industry/geographic/size focus, e.g. industrial and consumer companies with 10-25mm EBITDA in the midwestern U.S..

Again, tough questions to answer but figured I'd take a stab at it.

Again, this is a tough question to answer and I am by no means an authority here, but here are some themes I noticed with others who were successful in starting their own funds.

1. Built a proven track record in a specific niche through leading deals that later generate strong exits: Obviously the Partner usually takes the board seat, but having subject matter experience and relationships can make you the one who originates the deals and to whom the relationships are attributed. Lack of a board seat also doesn't preclude you from working directly with the company post-close on key initiatives

2. Catered potential LP relationships early on: This is pretty important. When you attend those annual meetings, developing good relationships with those FoFs, Family Offices, and Endowments is key. Not helpful from a deal generation standpoint, but when the time comes to a) move to another fund or b) start your own, those guys can be very helpful.

3. Clear story and differentiation on opportunity you are going after with the new fund: If you are raising for an industry-agnostic middle market private equity firm focused on companies with EBITDA between X and Y million, you'll have a tough time, since there are many funds out there. What you want to convince LPs of is that the opportunity you are targeting has a favorable risk/reward profile while exposing them to some differentiated factor, be it the nature of the asset, or the niche industry. Then when you establish that, you need to convince them why you are the manager that will generate returns here. What is your approach? Have you done it before? How have returns in your deals been?

Hugh Myron makes a good point on the search fund. I have noticed some people who started marketing to LPs who agreed to commit to initial deals prior to a fundraise closing. In this scenario, you don't need to wait for an exit, since the LPs are given the performance of the asset each quarter. If they see that what you're doing is working, you already have the introduction to the potential investor in your fund and they now have first hand insight into your abilities as a manager.

Long winded answer, but I hope it's helpful.

You have a few options:

1) Be the king of the rat race and make partner at a really well-respected firm. This is infinitely easier said than done; there are 35-40 year old guys who are highly competent with all the right backgrounds, etc, who are stuck in VP/Principal type roles because the whole industry is constipated the closer you get to the top (and becoming moreso). If you manage to succeed in making partner prior to 35, you are probably better off just hanging out as an MD at an existing fund. You may not technically be without a boss at that point, but you might as well be, so if you ever get there, you will probably view the idea of rebuilding the capital base and infrastructure in a new firm for your ego to be an uncompelling risk/reward, or just an old fashioned pain in the ass. That said, if you're deeply unhappy (or you topped out at

2 years IB BB to gain the analyst skillset > 2 years pre-MBA experience at a top PE firm > H/S/W MBA > 5+ years at a top PE firm with a proven track record > leave with 1 or 2 more senior partners from old firm > leverage old network of limited partners / partner capital / friends & family money, etc. >

Generally, to differentiate yourself you will have spent your career focusing on a specific industry or niche (i.e. healthcare, TMT, etc.) and ensuring that your skill sets are complementary (fundraising, financial engineering, operational experience, etc.)

One point worth noting is that unlike in a hedge fund where a PM may have his own P&L and can point to his specific contributions, this is obviously more difficult in a PE environment where it would be difficult to argue that an individual is primarily responsible for performance.

Another point worth noting is that there is no "perfect" path and in many instances the path will not be a linear upward progression. Many things need to go right (many of which are out of your control) for you to beat out the exceptional odds stacked against you.

Thank you all for the precious insights

Start a hedge fund (Long short), do really well, get more money, start dabbling in privates (side pockets), do well in that, raise a separate vehicle... Is another path I have seen, especially out here (not too common, but it has been done). Of course it's ended in disaster for many as well (the side pockets that is...)

That hedge fund path is very interesting. Do you have an opinion on what would make a hedge fund successful in a first place? Can cost and positioning make a hedge fund successful assuming you don't make too many stupid decisions with long/short positions?

Everyone above is correct. Let me add it's exceedingly difficult in today's world. There are just so many funds out there and a lot of the smaller or underperforming funds are having a harder time raising capital, so going out de novo is simply really hard. 10-15+ years ago when the space wasn't as crowded it was easier and you could come at it from different angles. I know a couple of guys who launched their own fund last year and without giving them away, one guy (mid 50's) was the right hand man of a billionaire PE/RE investor and the other (later 40's) had a significant investing track record, both had recognizable industry names, and they had a differentiated investment strategy so they basically ticked all the boxes and they were surprised at how difficult it was to raise money. And they were only going for a few hundred million (small compared to what they had managed before). They did it but they thought it was going to take a few months and that people would be throwing money at them, and I thought so also.

I'd say 30-35 is impossibly young to do it on your own with other guys your age unless, as others have stated, you join your MD as a founding VP. When you think about the typical PE career, you join as a post MBA associate in your late 20's so you're just not going to have the track record or investor/LP contacts to raise any money. The most important thing to have is a demonstrable track record, individually and as a team. Money in->money out. LP's are also not stupid and they won't really attribute deals you worked on as an associate/VP, and even to the Principal level, to you because you weren't the ultimate decision maker on those deals so it wasn't your investment acumen that made/lost money.

You also need a pretty significant amount of money either in the form of personal savings or a key investor. It takes a while to form a fund legally, get office space, have employees (you may be able to get away without these), and raise capital (you'll almost certainly need a decent placement agent and while they take a piece of the capital raised and a ride in the fund, they'll want a retainer and you have to pay all of their expenses monthly), and all of that takes a lot of money. And during this time, which I'd say you'd be lucky to do in 1.5 years, you need to live. You also need to co-invest in the fund as the management team/GP's. That may only be 1% but if you raise a $300MM fund, you'll need to kick in $3MM, and the prior formation and fundraising expenses will probably cost you close to seven figures if not more (fundraising ain't cheap). Let's say three of you decide to do it: you'll each need to have a minimum of $1.5MM in the bank to do it and afford living expenses. You can make good money in PE by 33, but not many guys have that much socked away that they're willing to put completely at risk. It's also pretty essential to have a core group of investors, be they UHNW's or an institutional, who will be a core initial investor. So if you're going to raise a $300MM fund, you should really have about $50MM circled before you even reach out to other LP's. That's pretty difficult to do by your early 30's. Not impossible, but not likely.

@"Jamoldo": if I remember correctly you're in Asia (HK?). That seems like a more common thing there but I'd say in the US and London that's much less common path currently unless you started an HF 15 years that did really well and you decided to diversify and get into PE. But like you said, that doesn't seem to work out too well for many HF guys. I'm thinking of DE Shaw in particular. They got into PE in the later 90's I think and after 07/08 spun it off or shut it down.

But OP your original question of the best path to start your own fund: be a fucking rockstar PE investor, become very senior/partner in an existing, convince a couple of guys you work with or know at similar funds that you all want to be a team for years to come and throw away your partnership and job security to hand your own shingle.

While most of the advice above is good and true, it more pertains to piggy backing off a senior partner on the most traditional path possible. I wouldn't really consider this starting your own fund. I don't think people on this path really do start their own funds in their early 30s. Hedge Funds this happens all the time but not in PE. Given that, I'd argue this wrong path to meet the goal (though a great path generally speaking).

Unless you are wealthy and well connected, I really only see one true path to have truly your own fund by your early to mid 30s. The path does not follow the traditional route of working at blue chips firms. Maybe a 2+2 but after those 4 years you gotta start making moves young. This is extremely risky but hell you're suggesting starting your own fund by 30-35. Basically, in my opinion the best path is buying a small company ($1-5mm). Get creative with structure - seller financing, SBA loans, seller earn outs, etc. Spend 3-5 years really operating this small business. Learn how to run a business, grow a business and ultimately sell a business. After 2+2 plus 3-5 years, you'll be in your late 20s. Do this again, with a bigger company. After 2 or 3 goes, you will have a track record and a decent amount of money. With a little bit of luck you can use this platform to raise your first fund. If you look at a lot of super successful guys with mega funds in the HF and PE world they are went off on their own extremely young and started super small, just like I outlined above.

these comments are right in a traditional sense.

BUT here is another point of view. you can be a monkey slave in a expensive city hanging out spending money working your ass off really enjoying none of it and getting old. OR

SBIC. DO it. stay hyper local, fuck kenya it just adds cost- your whole idea vetting with "how many yrs do you have working in kenya?" plus investor tours in africa? ya good luck mr. moneybags....

1. JOBs act has opened up an unpressidendeted opportunity to market your product. YOU have not been able to do this since 1933.
2. PE LBO firms are mostly undifferentiated- so just riff on a micro aspect and make it a macro- its marketing. helps to specialize. try not to build plan on a tax loophole.
3. Most important. To raise money first, build our a "team" (see below) then build a board make them kick in cash 15-10% now 90% on a term sheet from a distributor or on close of fund, keep your expenses to an absolute minimum. and no, a board will do nothing for you- and yes you have to pay them a salary- but only after the fund closes. promise them 10-15 hours a yr and make sure you look like you know what you are doing by having all governance docs done. MAKE it easy for them to say yes. target a 3-5% close rate on the people you call. IF you take your time and choose wisely, figure 3 months per director- 3 plus you. DO not put on your employees- cfo, coo, partner etc. IF you have little or no experience here about how it really works- be prepared to fail entirely- it doesnt seem important but DD and investors even at this level will spell it out wrong- sometimes its only a pitch issue, which you will never know.

Cut costs This means sell your car buy a beater, rent a 1br, sell anything you have that has value, get rid of all personal debt prior to this. RUN lean. NO office (executive when needed), part time CFO, couple buddies getting equity for their names on the about us page which you circulate privatly not on a website so they can get shit canned. and you are not going to tell them you want their names on a page for you to shop all over the place.

4. lower your expectations- you are not going to raise $100m or $50 or $20m settle for $5-10m
5. this is not your first or last fund, deploy quickly tout early results cut costs to the bone and promote promote. shoot to double your last fund. launch 1 fund a yr, then after the 3rd do a $50m offering.
6. always undersize offering- with a 15% Overallotment with a 90 day close. turn away excess investors, but keep in contact.
7. small fund with institutional investor friendly clauses is a marketing angle. bend over backward for this one- its not to make money for you just enough to market the second fund. superior track record is what you are aiming for- plus your board will love you.
8. RECORD everything- audited financials (get a big 4 and negotiate hard and shop), audited fund returns prior to dissolution- you would be surprised how many 100m funds don't do this or have a audited track record. best them in this area.
9. always try to lower cost of capital.
10. this market is about 1 step above the OTC BB pump and dumpers- so keep your eye on an institutional offering within 5 yrs.
11. don't get distracted, everything must be 1 step away from "getting the fucking money". want to vet fund administrators, its too far away from "get the fucking money" want to shop for office space? "get the fucking money" generally anythign related to spending money is too far away from "get the fucking money".
12. Your ok is someones perfect- so dont spend too much time on futtsy things like finding your Sicilian rail font for your business cards or wasting time with directors that are no's. or cannot invest.
13. most important- focus everything on getting the fucking money, which is connected to your investment thesis- because if the thesis is good or marketable it needs to be done now!!!!

The mindset here is mel Gibson in patriot (guerrilla fighter) vs 40yr wall street vet (English army).

IF you want to hop out the box and make what a mba 1st yr associate makes in a PE firm this is not the path for you. expect to dollar avg. almost nothing for 3 yrs.

IF you suck at public speaking and cannot clearly differentiate your strategy- get training at toastmasters.

call couple funds small in other cities see how they did it. take notes.

Do you think that there is is still room for the development of value-oriented funds such as Oaktree or do investors now have to add value themselves to their investmens (for exemple through LBO or turnaround)?

This is an awesome fucking thread, seriously.