Any ideas on what I should do?
Hey guys -
Have a question regarding a situation I'm in - hoping the more experienced guys can chime in here. Long story short, a while back, I was given the opportunity to run a fund with seed backing from one HNW guy. Background is I've worked on the buy-side for ~7 years in the PE/HF space. We are currently around ~$10M in assets (and growing), and have been up and running for 3 months; we are at double digits for the year. I should mention that while we are up and running for 3 months, I spent the 7 months prior getting the infrastructure in place, so I’ve been working on this for ~10 months.
It's becoming increasingly clear to me that the fund structure isn't ideal. What do I mean by this? My one main partner who has seeded the fund with his own money essentially brought in 8 other of his "friends" as GPs. While some of the guys have value adds (lawyers so we get free eyes on legal, etc.), others are completely useless and don't pull their weight at all (some of them have never even invested in the fund - literally $0 - and the ones who have, have invested as much as $100k). For context, I run the entire general operations of the fund and the investment process end to end (Idea Generation, Diligence, Execution, Portfolio Management, etc.). Everyone else literally has no day to day responsibility (I am effectively the fund).
My comp is a base salary in the $200s, 10% ownership in the GP, and 4% of gross PnL. I've also had to contribute no money to the fund at all; my partners have bankrolled everything.
I knew exactly what I was getting into when I accepted the above offer to run the fund, as it was a great opportunity to step up from Analyst to PM and have complete discretion in the investment process - my experience has truly been amazing. However, it's becoming really irritating to me that I'm a 10% owner in this fund and have complete responsibility for everything while mostly everyone else is freeloading, not replying to my emails, and honestly not contributing anything of value at all - I simply don't think that's fair or equitable. While I'm grateful for the opportunity at hand, I'm also mentally forecasting this situation out, and I can't see myself working here over the long term as a 10% equity owner. It was also pitched to me that I would “run the fund”, and my partners would raise money. It’s been a few months now with 0 dollars coming in, and I’ve been having to shoulder this on my own while concurrently running the fund, which is a bit stressful. I am also a bit resentful towards my partners because they haven’t delivered on their end of the bargain. This has also rang true in a few more instances where what has been promised is not what has been delivered.
Since I've been up and running, I've attracted the attention of 4-5 different parties who have reached out to me unsolicited - and have been courting me to replicate my investment strategy with them; these parties range from asset managers and family offices to larger hedge funds, etc. All of these parties would give me, on day one, starting capital to manage of $25mm-$100mm+ to manage in addition to better economics than I’m getting now. As an FYI, I structured into my current contract a portable track record, no non-compete, etc.
My questions are this:
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Based on the above, what % ownership do you think is fair and equitable for me to aim towards with my partners?
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When should I bring up my concerns to my partners? I was thinking after I finish up November/December (and obviously contingent on performance), I bring this up early next year?
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If my partners refuse to give me the % ownership I seek, what should I do?
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Should I look to make a jump to another platform in light of the fact that I only will only have 4 months under my belt at my current firm? What if the offer is more compelling?
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I have a few $mm waiting to come in to invest in the fund, and I also have potential capital commitments to investments; how do I handle both if I end up leaving?
Thanks much everyone.
I, barely out of undergrad, and at a shitty boutique, would be pleased to assist you with your problem
Bump.
Honestly, it's not a bad deal. Do your part for the next two years and pivot to another firm.
Awesome job and hope you succeed.
Do you mind listing the major expenses you have in terms of dollars to set up the fund?
Is it possible to set up a family office and have minimum expenses.
Do you always need to hire a CFO for example.
You’re not going to get much good advice, as you’re problem is not very relatable to 99% of the people on this forum.
As for general advice, I would have a sit down with the main guy who bankrolled you. Talk to him December and let him know that some of the partners are not pulling their weight and he needs to talk to them because they are his contacts. He gave you your shot, so don’t jump ship yet.
I guess I’m confused about these partners. Arnt they just supposed to provide you the money and you do all the work? When you say they are free loading what do you mean? They just give you seed money right?
Thanks for the comment. In addition to seed capital (which was only provided by 2/8 partners), the other partners are supposed to take on the Capital raising function of the fund through their network of HNW, UHNW, and family office contacts. In reality, while the seed partners have contributed the initial capital, the others are not pulling their weight - and are in fact not doing anything at all.
Doesn't sound that bad to me, especially if you are getting those economics for free? I'd suggest having a talk with some of the other partners to try and iron out some of these issues. Out of curiosity, exactly how much capital do you think you should be raising off of a three month track record? Why not just chill and invest for the next two years and see how it goes and then worry about scaling the business? Could you restructure your management agreement to provide you with GP earn-in based on performance metrics, AUM, profitability, etc?
Thanks. My worry is not so much that we should be raising millions/tens of millions off a three month track record (I know that's very unrealistic) - it's just that we're almost fully invested and I'm not going to have the ability to deploy capital actively (will likely just be doing nothing and managing a portfolio). On principle, it's also bothersome that what was promised straight up wasn't delivered.
To your point, I can hang and clip my salary/upside, but I think given my dialogue with the partners (them reneging on certain parts of my contract, etc.), restructuring the agreement will be a challenge. Have thought about this, though. I would much rather be able to scale at a quick pace, stay active in my investments, and run with the ball rather than let a couple years pass in a "what-if" scenario. While I will be building a track record, there's also the possibility that nothing happens.
If they were pulling their part, and maybe assets weren't coming in but you could see the effort, would you be ok with your current setup if left unchanged? It seems to me that if the are reneging on their promise and you have both established infrastructure and to-date delivered acceptable performance results then you actually have more leverage to insist on amending your agreement. The threat of such may be enough to get their heads in the game.
Being near or fully invested without line of sight to inflows can be frustrating. Have you considered providing your partners with a weekly or bi-weekly summary of ideas you're working on in varying stages of actionability along with estimated returns, P&L, and timeframe? This would be a very strong data point to help with raising assets...to show you have more compelling opportunities than capital to invest. In fact, that would probably be a key document to show or discuss with prospective investors. As full as your plate already may be with the portfolio, I think spending some extra time constructing an idea tracker that can be easily exported into a discussion materials format may be worthwhile, especially if your capital is running out and monitoring is going to be taking up more of your time vs. actively deploying capital.
As for your other partners, it is absolutely crucial to ensure alignment of interests of all parties in a venture like this. If someone is truly reneging and not pulling their weight they should be held accountable. This will only work if everyone is aligned.
I don't see a problem here and your train is actually right on schedule.
No one would take this job you've described except for 1 reason, which is to practice your own investment process at the expense of someone else's capital (albeit a paltry $10mm). Nevertheless, you said yourself that you gained a lot of invaluable experience and now it's time to move on. Don't focus on what others are doing, you don't control them. You were able to step up from Analyst to PM, have a shot at managing capital to generate alpha (albeit was a nice time given covid as results have been pretty binary), and now you can look forward to jumping to another platform. My only advice is to do this first, figure out your next move, then sit down and re-assess with your partners later. Right now you have nothing and you would be wasting your time talking to them until after you have next steps. Good luck!
Thanks for the great insight. Yes - gained a lot of great experience and made the jump to PM which is very important. Will certainly keep the dialogue going with these opportunities and then reassess w/my partners at a later point.
Someone finally said it. But man some people are far too nice. Bottomline at year-end you have a discussion saying look either give me more upside or explain to me how we grow. First off the 6 partners that do shit all who cares for them. The other 2, you leaving them 10months in up say 12% they getting like 1-2mm for doing nothing. Never get why people are upset when people leave up them money.
As for why you leaving mentally you already there. Start talking to a MM or whoever that can grow your book 3x to 10x it sounds like. Once a real opportunity arrives you ask the other 2 partners whats up with 1 foot out.
This is not an industry where you sit around “to see what happens” or so. Truly if you stayed with that level of capital and conviction doubt you guys survive 2 years even.
Lastly, always think other way if you were down 5% and partners saw no room to grow. You think you wouldnt be replaced?
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