Can You Invest in the Fund You Work For?

Out of curiosity I have a unique opportunity to invest in the Fund I work for and I know some other people in the industry who have the same ability.

Are you able to invest in your own Fund with a very small amount of capital? Would you do so if you had the opportunity?

 

Yes, we have a separate share class for employees (i.e., without fees etc.). Yes

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

I work in VC, and I can't say for sure in PE, but everyone at the Partner level is often invested in the fund they manage... It helps loads with getting outside investors because it shows that you're not invest in anything crazy because "it's not your money"

"Be the Disruptor, not the Disrupted" - Clayton Christensen
 

Co-invest is very much a thing. When you join a firm, you have the option to co-invest. Co-invest is structured differently between firms. At mine, we commit a flat $X per deal. You aren't able to cherry pick deals (commit $50k to one deal you really like and $5k to one deal you hate). Not sure if this is the industry standard but that's how ours works to align interests between the fund employees and the LPs. Co-invest is nice because you don't have to be a accredited investor and still get to participate in the fund (with some fees waived helping to increase returns relative to standard LPs). Some firms may give you a low interest rate loan or an advance on your bonus to fund your commitment so you don't have any actual cash outlay.

 

I've worked for firms that have allowed it and firms that have not.

In almost every situation I would 100% do it. Just think about it. How many opportunities do you have where you can deploy a large % of your savings into an investment you personally have to do little to nothing to receive long term capital gains with IRR's almost always north of 10%? That's pretty flipping hard to do with your spare cash outside of your day job!

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 

It won't be your old boss. They won't have anything to do with it. If it is any type of reputable fund it will just be the controller/CFO.

This is very common. How many new funds are being started by partners/principals that just left their fund to do their own thing.? They all have carry, GP commitments and co-invest in the funds they were working at...

So, said differently, the quantum of your investment as an associate will be so minuscule no one will care and there is little to no chance it will be a big deal in the later years. You should really just focus on if the returns are what you are looking for and if you don't need that money for 5-10 years.

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 

An employee of a GP of private funds can invest in one or more of the funds if he is either an accredited investor or qualifies for the "knowledgeable employee" exemption.

Knowledgeable employees are essentially those who participate in investment research and decisionmaking. So, junior analysts yes, but secretaries no.

The GP often waives management fees for employees, so they pay only the performance fee if there is one.

A downside to investing with your employer is if the fund or firm blows up, you can lose your nest egg as well as your job.

 

It depends on how you are investing - are you investing in the fund as an investor or are you investing the firm? In the former, you will pay the fees. In the latter, you will not. Typically, only more senior employees can do the latter since then you become an equity partner in the firm.

Regarding putting all your eggs in one basket, that only works in academia. In the real world, investors practically demand that the firm has its own money invested alongside theirs. As a junior level employee, you won't have to worry about it, but as you move up you will be "strongly encouraged" to invest in the fund. That goes for both AM and HF.

 

In my fund people invest in the fund itself.

I agree that partners do have to invest in the fund and that part of bonus is usually via fund investment.

That said, when its your call to invest or not, I agree with Ravenous, is better to diversify. Specially for small funds where if the fund goes bust you loose your job an your investment.

absolutearbitrageur.blogspot.com
 

i know cases where employees have management fees waived. A lot of funds prohibit direct single name security trading via one's PA, so for an employee who wants grow the egg the options are kind of limited. Overall i think it depends on the fund's strategy and whether you're comfortable with it. Then again if you're not comfortable with the strategy and all why do you work there.

 

From what I've seen it's mixed whether or not junior employees are given the chance to co-invest. Depending on the products the fund offers, more junior employees may not be allowed to participate from a regulatory standpoint; others may prefer not to deal with what is (to them) extremely small potatoes from employees.

Regarding fees, it depends on how the fund is structured; oftentimes employees pay standard fees but I've also seen hub-and-spoke structures where one feeder is partner/employee capital and either doesn't pay fees or has a side-letter to return them; other funds I've seen have "partner class" LP interests that have a lower fee structure in return for longer lock-up etc.

I expect that if the carried interest rulings get changed, more funds will move partner capital to a zero-fee structure.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

I have money in my fund - since I'm not accredited, I had to be with the fund for 1 year. No incentive fee and discounted management fee.

In most HF offerings that I've seen (I guess 5 or so) the language on the fees was always "at the partners' discretion". So they can charge other investors (employees, pension funds) less than the stated rate if they choose.

I felt a bit pressured to put money in, and now that I'm in, I also feel like I can't pull the money out if I need it. Sure, no one would stop me, but if you pull money out to invest elsewhere, that is making a statement about your view on the fund's prospects.

In short, I would suggest against it.

 

Know a PM running 1bn+ who encouraged his analysts to invest in the fund. I think primarily because it looks good if employees are invested (shows skin in the game top management to bottom as well). But until then no one from the team had their money in the fund. I guess the profile of analysts were such that the ones who already made it big weren't that fussed about 'investing personal savings' and other guys were only 2-3 years on the buy-side so had bigger priorities such as buying a house.

I guess no matter how smart and aggressive buy-side people are when it comes to investing their own money they take a step back. A few I know literally put in 10k because technically they are investors then and no clients ask specifically how much an analyst has invested - it's more about the PM's and partners.

 

Indeed, and even while working there you should try not to invest too much in order to reduce the risk to your income and wealth. That is, if the fund goes under, not only do you lose your job, you lose your savings as well. Diversification applies here.

 

If you can co-invest on a deal by deal basis you can make bank.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

Not allowed to (per compliance) other than what we receive in stock options and exercising those it a bit of a chore due to being considered "inside" an average of 11 months per year. But we are a $4bil boutique, so it may be different that in most IB's.

GTAA Mistmaker
 

At my shop, part of the bonuses are deferred with the option of being invested in the fund or treasuries. Most people choose the fund and while we can invest more than that in the fund,most just leave it at that.

 

Is this hypothetical? Most funds wouldnt accept a $125K investment....

But either way, I think it depends on how much control you have over investments. If you had significant control, it would be enjoyable to me to participate in the up(down)side of my picks (natural incentive to perform well).

However, if your role is minor in the grand investment picture - I would recommend staying due course. As you said, it would just be increasing your personal risk (savings and salary are exposed to fund performance).

Just my opinion.

 

I think it very much is a personal decision on your risk tolerance and whether or not like you said you want to lever yourself to the firm. At my firm part of your bonus is automatically deferred with the choice to have it put in treasuries or in the fund and the rest you can opt to defer yourself (obviously there are tax benefits). We also let employees invest a few times throughout there year so we would accept a $125k investment.

In my case I ended with a similar amount of my $$ in the fund more for tax purposes then anything else but we run pretty concentrated and are long term so I generally can make educated decisions on where the fund is invested and think about the next 12 months or in your case however long your $$ will be locked up.

Also, I'm not sure if you mean multi-strat like an Eton Park or multi-strat like Balyansy but I have friends at some multi-strat places that invest across the capital structure and even in some illiquid longer term credit situations (bankruptcies, lehman, etc.). The point here is that if you're at that type of place its not hard to look at where the fund is invested and try to back into potential credit resolutions, potential distributions, etc...

 

They allow employees to invest any amount so that is not a worry. Its multistrat along the lines of Eton Park not the multi-manager model so being in credit / equity / illiquids is a nice foil to the long only S&P / FTSE index funds I am in now.

I am going to go ahead and put 50% in. Thanks for advice.

 

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