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Mod note (Andy) make sure to see the response below by
Marcus_Halberstram:
"The main driver, IMO, for diversifying away from pure PE and into other alternative and conventional asset classes is that there is a very clear and distinct shift in the PE business model away from the 20 and towards the 2. In my view, this is for 3 reasons..."

I'm starting business school this year and don't plan on coming back to PE, so I don't really care who the "most prestigious" PE firm is. However, I thought I'd offer some perspective as someone who has worked on the buyside for two years, especially since lots of college students on this forum don't really seem to appreciate how much things have changed over the last 10 years.

***Based on some of the responses, I just want to clarify that I am by no means claiming to be an authority on PE firms. I've worked at one firm for only two years, so most of what I'm saying is not going to be new to anyone in the industry. A lot of it is also hearsay, so feel free to disagree.

My general sense is that PE has become a rather commoditized business. People say that the days of generating returns through financial engineering are over, but operational improvements don't seem to cut it either when everyone just outsources to the same consulting firms. The easily fixable businesses have been picked clean, and things like group purchasing organizations are nothing new. Bankers are also there to make sure that every sellside process is as competitive as possible. If you've received a teaser about a company, you can be sure that every single one of your competitors has as well. Funds that used to return 30%+ back in the 90s and early 2000s now consider 20% to be a win.

A lot of the megafunds have also become much more risk averse. The senior guys have nice cushy jobs, and the founders are old with more money than they could ever spend. They don't need to prove themselves with 35% IRRs when they can make 20% and live comfortably off the management fees. They also don't want their fortunes to be tied to the carried interest of their PE funds, so everyone seems to be diversifying--FoFs, credit, asset management, capital markets, hedge funds, etc.

All that being said, some PE firms have clearly fared better than others.
_______________________

KKR - Their name is synonymous with PE, but they haven't done very well in the past few years. They had a hard time fundraising this year and only raised $6bn (targeting $8bn). Work culture is similar to Blackstone/Apollo--generally pretty intense hours and very quantitative/analytical work. ~7% IRR on their flagship 2006 fund.

TPG - This is an interesting one. Very poor recent performance due to a few large deals that completely blew up. Negative IRR on their '06 fund, and single digits for their current one. Partners aren't getting carry and I would expect them to start downsizing as their next fund will likely be significantly smaller than the last two. Not an ideal place to start a long term career, but, for associates, I've heard lots of positive things about their culture. They recruited only for their SF office when I interviewed, but I think their NY office is tiny anyways.

Apollo - These guys have some serious balls. They made a huge bet during the downturn buying up the distressed debt of their portfolio co's and basically doubled down on many of their investments. I remember my boss saying these guys were "betting the firm". They made an absolute killing when things recovered though--28% net IRR on their 2008 fund, although a lot of that is probably Lyondell. They're also in the market right now and it looks like they'll definitely exceed their $12bn fundraising target. Some people say they're smart and actually take a view, others say they just made a huge gamble and got lucky. Their associate class is pretty small (~3 people--believe most other megafunds hire like 6-10), and they get worked hard. Only difference is it's not a 2 year and out program.

Blackstone - Less than a quarter of their AUM is now in PE and that percentage will probably continue to shrink. They're perhaps the best example of a PE firm becoming more of an "asset management" business where the focus is more on AUM growth and management fees rather than absolute returns and performance. Senior guys like Chinh Chu are also no longer in the weeds looking for 5-baggers, so I'd be shocked if they ever pull another deal like Celanese again. That being said, Blackstone is still one of the most respected names in PE and they have top-caliber people. Their real estate fund is arguably the best in the industry. They also have an interesting tactical opportunities fund that can basically invest in anything.

Carlyle - A bit of a mixed bag because they have an enormous portfolio of different funds. They're probably investing out of over a dozen funds at once. Their last mega-buyout fund was in 2007 and returned ~10%, in the middle of the pack for that vintage, but their distressed fund (strategic partners?) has done better. DC office does aerospace/industrials and also has lots of back-office staff, while NY covers all the other industries. I never really understood why all their industry groups are run so separately. There's minimal interaction among the different groups except at the most senior levels, and each group actually had its own interview process when I recruited. Everyone I know there seems to have very good work-life balance and generally like the culture. They're quite bullish these days, but my sense is they've been paying some very rich multiples for some of their acquisitions.

Bain - Similar to TPG. Definitely not what it once was. I guess operational improvements don't get you as far these days. ~0% IRR on their 2008 fund, and looking to raise $6bn for their next fund. Supposed to be a good place to work, and strong bschool placement. I hated their case study interviews. Don't know anyone here unfortunately, but they're probably the only megafund that consistently hires consultants. Last I heard they were in the market for a $6bn fund but will probably close at around $3bn

Warburg Pincus - Not discussed as often because they don't focus as much on mega-buyouts, but they just raised a $12bn fund so they definitely belong on this list. Most of their investments are in growth equity, but they invest across the spectrum (as early stage as venture capital) out of one fund, which is pretty unique. One of the oldest PE firms out there and it doesn't look like they're going anywhere. 6% IRR on their 2007 fund. Their energy group does some very creative financings. Culture varies a lot between groups.

Goldman Sachs (Capital Partners) - Haven't seen them on too many deals despite their size, but my impression is they tend to get in on a lot of club deals. I'm not sure what their story is, so if anyone is more familiar with this group please share your thoughts. I believe their large AUM is a factor of lots of firm/partners money being invested in the fund.

Would love to hear some other opinions, especially from people who've worked at these places.

4 1

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Comments (48)

  • mrb87's picture

    Do you actually think you're insightful, or do you realize how glib and inane this post is? You're just throwing out some general IRR/fund size #s and parroting second- and third-hand generalizations about firm culture.

  • Kanon's picture

    Whether or not it is meant to be "insightful", it was a nice glance over summary. Some of what he said are the general points that most PE professionals or LPs have been echoing for some time now. But these points could still be new to younger readers on WSO.

  • West Coast rainmaker's picture

    I'm in ER, so I don't really have an interest in PE exits.

    But, I always thought it would be preferable to go to a MM shop in a good location with a good culture that might put you on partner track. Or maybe an industry-focused firm that will be able to generate excess returns through specialized knowledge (energy, FIG, healthcare, etc).

    It just never seemed like the megafunds were that great beyond a credentialing standpoint. If you want to go to bschool, then of course it might make sense...but I never thought they were the best places to build careers. Of course, I haven't done any real due diligence on this. Do you have any thoughts?

  • abcdefghij's picture

    Not that new but fairly accurate/on point.

  • Money4Life's picture

    Thanks. I think this is a great post and is definitely useful info to know!

  • AstonMartin's picture

    Useful, thanks. What are people's thoughts on MM PE firms? Which ones are the best?

  • ManyHenny's picture

    What do you mean by that Chinh Chu line?

  • Beny23's picture

    Thanks for writing this. It's really helpful!!!

  • In reply to Kanon
    mrb87's picture

    Kanon:

    Whether or not it is meant to be "insightful", it was a nice glance over summary. Some of what he said are the general points that most PE professionals or LPs have been echoing for some time now. But these points could still be new to younger readers on WSO.

    Yeah, except he's writing his post as if he's some sort of authority on the subject. He spent *two years* on the buyside and says college kids don't appreciate how much things have changed over the past *10 years*? OP was probably just starting high school 10 years ago.

    What *would* be more useful and interesting is if he offered us his UNIQUE perspective on his experience in PE -- that's something people here couldn't get with the search function, and something that would be of interest not just to the college kids but to the other professionals on the site.

  • In reply to mrb87
    Kanon's picture

    That's true (that it would have been nice to hear a unique perspective), but like you said, he's only been in PE for two years. Truthfully, any junior banker or junior PE guy won't be able to give anything truly unique or insightful or whatever. Not trying to be condescending, but more realistic than anything... after all, most junior professionals don't stay in long enough to see a deal they've done (or more lightly, contributed) from start to sale/realization.

    He stated outright he spent just two years there - so he's not implying he's some authority on the matter. I personally took his post as providing some very introductory points to the current PE market that some college WSOers (or maybe newbie bankers who want to do PE but aren't completely aware of what it is like) and posting them for their consideration. Guy's just trying to help out newbies, while opening up the floor for other PE WSOers to provide info, no need to make a big deal about it.

  • In reply to Kanon
    mrb87's picture

    Kanon:

    That's true (that it would have been nice to hear a unique perspective), but like you said, he's only been in PE for two years. Truthfully, any junior banker or junior PE guy won't be able to give anything truly unique or insightful or whatever. Not trying to be condescending, but more realistic than anything... after all, most junior professionals don't stay in long enough to see a deal they've done (or more lightly, contributed) from start to sale/realization.

    He stated outright he spent just two years there - so he's not implying he's some authority on the matter. I personally took his post as providing some very introductory points to the current PE market that some college WSOers (or maybe newbie bankers who want to do PE but aren't completely aware of what it is like) and posting them for their consideration. Guy's just trying to help out newbies, while opening up the floor for other PE WSOers to provide info, no need to make a big deal about it.

    Fair, maybe I'm just in a bad mood but in general I prefer to see additive content here.

  • In reply to AstonMartin
    Crimson1888's picture

    H&F, New Mountain, CD&R, Berkshire, WCAS, GTCR, LGP, Lindsey Goldberg...etc. etc. etc. There are a lot of good MM firms that specialize in different areas. Similar to the MFs, there's not really a way to rank firms, as most of these have been around for a while and their performance differs fund by fund.

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  • ke18sb's picture

    Agree with Kanon - very useful information was provided. No need to hate.

  • Kanon's picture

    Actually the IRR figures were new to me, surprising how low some of those are (2007 funds, no surprise, but still).

    OP - if you don't want to continue in PE, what would you like to do? Something still in finance realm or completely different field? And why not perhaps going into MM PE that focuses on one or two particular industry sectors they specialize in, if there's perhaps disinterest or disillusion with megafunds?

  • dazedmonk's picture

    Haters need to chill. You want a unique perspective on a MF get a job at one.

    Think this was an interesting perspective, especially about comoditization, deteriorating returns, and increasing risk aversion. I think it is pretty much the same across large buyside firms. The HF industry (especially equity l/s) is definitely going the same way - becoming less creative and less risk taking at the top.

    I think its good to get the 'big firm' brand on your resume, but if I had to give some long-term advice I'd say 'go small, go young' (as in the kind of firm you should target)

  • brandon st randy's picture

    Appreciate the write up. Thanks for sharing your perspectives here
    "Blackstone - Less than a quarter of their AUM is now in PE and that percentage will probably continue to shrink. They're perhaps the best example of a PE firm becoming more of an "asset management" business where the focus is more on AUM growth and management fees rather than absolute returns and performance."

    Do you count GSO as part of their PE platform? They just raised a new $5B rescue finance fund which is an up round from their rescue finance fund I of $3.25B. As the buy-out space becomes more commoditized and good deals dry up I am seeing that a number of moves by mega PE firms to get into the rescue financing/asset backed lending space targeting MM companies.

    "Funds that used to return 30%+ back in the 90s and early 2000s now consider 20% to be a win... They don't need to prove themselves with 35% IRRs when they can make 20% and live comfortably off the management fees. "

    I bet the megafunds would love to make 20% and live off that. Still as you pointed out, many of their funds are having a hard time getting even 10% let alone 20. The combination of ever larger AUMs and diluted returns means that they literally forced to scorch the earth and scrap the bottom of every barrel in search of places, as in any places, to park their capital. That is why with the U.S saturation everyone is being forced to step up and venture further and deeper into emerging markets.

    Too late for second-guessing Too late to go back to sleep.

  • unknownjoe20's picture

    Apollo has about $110 billion AUM and more than half is from their credit funds. They also hire way more than just 3 associates per class, more like 6-7.

    "I'm into, uh, well, murders and executions, mostly."

  • Marcus_Halberstram's picture

    Ummm... while the info in here is more or less accurate, I disagree with how it is being interpreted. I don't see PE funds diversifying away from straight PE because the founders/GPs want to diversify their own person wealth... thats a bit ridiculous a statement (if that is what you were implying).

    The main driver, IMO, for diversifying away from pure PE and into other alternative and conventional asset classes is that there is a very clear and distinct shift in the PE business model away from the 20 and towards the 2. In my view, this is for 3 reasons.

    1. Foresight: those in the game know that in the world of asset management (PE, HF, conventionals) PE/HF fees are at the top by a longshot at 200bps management + incentive. Most others are 20-75 bps, all-in.... your incentive is you do a good job and I don't yank my fuckin allocation out of your grimy little paws... oh and you get to make another 40bps on the capital appreciation, you mutual fund scum. Carry is getting squeezed because as the OP had mentioned median PE returns have been trending downward for the last decade or 2, making carry on 30%-8% hurdle > carry on 20%-8% hurdle. Those 30% deals just arent as common anymore. Also LPs are negotiating down management fees, and many of them have been doing so for a while. The CalPERs of the world know how important they are to PE firms, and they often times get in at a management fee up to 100bps below they PPM rate for their monstrous wholesale commitment. So when your income streams are coming under pressure what do you do? Your management fee income is management fee % x AUM, your % is coming under pressure so you jack up your AUM.
    2. There are clear benefits to scale. All these LPs are allocated across asset classes and when the most valuable things you have are your brand and LP relationships, it makes a lot of sense to leverage that into adjacent asset classes.
    3. The legacy factor: ALL of these guys are egomaniacs. They want to be the ultimate and they feel like they can't do that in only the PE asset class... so they're diversifying into other asset classes so they have the biggest dick this side of West New York. They want to be that behemoth of an asset management firm that is around 150 years from now.

    Now coming back to square one... is PE on the decline? I don't know, maybe. I know its as competitive as its ever been. I know that through the pre-crisis days it was preforming off the charts and as a result the asset class was heavily over allocated... people had waaay too much money in this asset class... post-crisis, everyones a lot more conservative and the asset class isn't throwing up the types of returns it used to. So what happens? A shit load of PE capital goes back into fixed income, mutual funds, public equities, commodities etc... Add to that the fact that the 100m portfolio that was 30% PE, and 70% conventionals... PE is illiquid and not marked as quickly... so when their conventional portfolio went down 30%... they now had 30m in PE and 49m in conventional, now theyre 38% allocated to PE, and that was an additional factor that exacerbated fund outflows from PE. Where am I going with all this? Well, much like the housing crisis, when there is too much inventory on the market shit starts flowing in the streets and thats what you're seeing now with many well known storied PE houses failing to hit the targets (often by a huge margin) on their PE fund. The PE industry is shrinking. But in my opinion, its a natural and healthy shrinkage.

    Much like real estate, a lot of people got a seat at this table that had no business being here but it was a frothy market and so they made a few bucks. Now its right sizing again and only the best performers are able to re-raise large funds and hit their targets.

    The PE asset class has been characterized by going from one phase of value creation to another. I'm hopeful there will be another innovation. Will it be as profitable as it used to be, no. But a lot of the riff raff is being expunged from the industry making it more rational and more disciplined which is good for everyone. Until the next cycle that is.

  • Marcus_Halberstram's picture

    GSCP is not at all in the same class as these guys. Its not megafund in any way other than actual fundsize. I know some really smart people that are there or came out of there, but I just don't consider it at the same level as the firms mentioned above. They're much more passive, they piggy back a lot of their investments. When any of the above-named PE firms gets a good angle on a deal and wants to syndicate some risk they'll call CalPERs and OMERs and ask them if they want to sidecar... then they'll call GS and ask them if they want a piggy back ride. (Syndicate the risk as in they find a deal that requires a $1.5bn equity check, but they're not thrilled with putting 1.5bn into a single investment, so they go halfsies with a bunch of other investors.) What this consists of is a partner at GS gets a call, they get a bunch of prepackaged diligence laid out in front of them, they do a bit of their own work (not much) and decide if they want in. Not a tremendous amount of value to be added there.

    I'm obviously exaggerating a bit, they're not exactly straight mezz investors... but like I've said before I'd go to several dozen other PE firms before I went to GSCP. Many people go there either cuz they dont know better, they dont have any better options or they just like saying they work at GS because when you tell someone outside of finance you work at TPG or Apollo they don't know what a stud you (think you) are.

  • In reply to unknownjoe20
    parvenu's picture

    unknownjoe20:

    Apollo has about $110 billion AUM and more than half is from their credit funds. They also hire way more than just 3 associates per class, more like 6-7.

    Pretty sure he's only talking about PE associates. Otherwise places like Blackstone probably hire 20+ across GSO, BAAM, etc.

    I believe Apollo hired 2 PE associates in the class that started this year. No clue about their credit fund.

  • anonmonkey's picture

    What groups does Apollo recruit from?

  • Matrick's picture

    Interesting overview, thanks for sharing. Besides the various returns, I think that everyone will agree that working at any of these funds would be a great career move for anyone coming from IBD.

    @moic: What is your plan after B-School?

    I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

    See my Blog & AMA

  • In reply to AstonMartin
    Crimson1888's picture

    MM funds are facing the same problems. In fact, with firms that previously raised enormous funds struggling with fundraising it looks as though their average equity check may shrink, creating even more competition for MM deals.

  • Banking34075's picture

    @slavemaster I know that there's one from BX M&A

  • In reply to anonmonkey
    kidflash's picture

    slavemaster5000:

    What groups does Apollo recruit from?


    an evercore guy just joined too.

  • In reply to AstonMartin
    CompBanker's picture

    AstonMartin:

    Have MM in general done better than the megafunds in recent years? Or is the mid market space facing the same problems?


    The MM, broadly speaking, is all over the map. Far more variability. Some funds are crushing it and have hit their fundraising targets within a few months of fundraising. Other funds have been unsuccessful fundraising and will be winding down in the coming five years.

    CompBanker

  • Uninformed's picture

    For summer 2014, Apollo's class is: BX M&A, BAML Sponsors, and not sure about the last

  • In reply to Crimson1888
    brandon st randy's picture

    Crimson1888:

    MM funds are facing the same problems. In fact, with firms that previously raised enormous funds struggling with fundraising it looks as though their average equity check may shrink, creating even more competition for MM deals.

    If the average equity check for the typical MM funds shrink then the space may actually consolidate in a few years. A number of PE firms will go out of business/convert into pure consulting/advisory shops while others are forced to settle with much smaller AUMs than before and desired. Only then can alphas make a return to the space as the few (and proud) top performers who managed to get the capital they need will be able to pick and choose which good deals to invest in and on what terms.

    Too late for second-guessing Too late to go back to sleep.

  • ricyan's picture

    Great and informative post. Nice additional info there, Marcus.

    Progress is impossible without change...

  • In reply to Uninformed
    parvenu's picture

    Uninformed:

    For summer 2014, Apollo's class is: BX M&A, BAML Sponsors, and not sure about the last

    BX M&A, BAML, MS M&A, might have hired a fourth this year, not sure.

  • In reply to Marcus_Halberstram
    mlamb93's picture

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  • In reply to CompBanker
    parvenu's picture
  • Mcom's picture

    All warfare is based on deception. - Art of War

  • In reply to abcdefghij
    brandon st randy's picture

    Too late for second-guessing Too late to go back to sleep.

  • In reply to brandon st randy
    Mcom's picture

    All warfare is based on deception. - Art of War

  • In reply to Mcom
    brandon st randy's picture

    Too late for second-guessing Too late to go back to sleep.