How long can a fund last with 3rd quartile performance
Working at a fund that has adopted the following “business model” - not willing to pay people market level pay and therefore can only retain / attract poor quality investors (think people who just trade on their friends recommendation and constantly hitting bombs), high attrition on investor professionals and IR, re-up is usually 30% smaller in subsequent funds, but then the fund just does a rebrand of strategy and tries to find some new first time LPs to scam again as existing LPs don’t want to re up (or fund spins some new strategy and blame poor return on luck). Fund is also very aggressive in marking - returns shown in marketing are significantly higher than underwriting but adjusted with significant footnotes (weighing investment differently, excluding vintages, etc).. also frequently hiring IRs that are pushed out from megafunds to milk their contacts for 1-2 years, before realizing only 1-2 of their contacts will bite and pushing them out again (significant turn over in IR).
How long before the whole LP base wakes up and abandons wholesale?
Based on the most insightful WSO discussions, a fund with 3rd quartile performance and the described "business model" can survive for a surprisingly long time, but its longevity is heavily dependent on a few factors:
Fundraising Cycles and LP Turnover: Private equity funds typically operate on a 10-year lifecycle, with a 5-year investment period followed by a 5-year harvest period. However, funds often raise new capital every 4-5 years. If the fund can consistently rebrand and attract new LPs (especially first-time LPs who may lack due diligence experience), it can extend its survival. Institutional LPs, such as endowments and pension funds, often avoid first-time funds, but family offices and smaller investors might still bite.
LP Patience and DPI Realization: LPs generally wait to see DPI (Distributions to Paid-In Capital) before making re-up decisions. If the fund's returns are manipulated through aggressive marking or selective reporting, it might delay the realization of poor performance. However, once DPI trends become clear (typically 6-10 years after the first fund), LPs will likely abandon the fund wholesale.
Rebranding and Strategy Pivots: The ability to rebrand and spin new strategies can buy time, but this tactic has diminishing returns. LPs, especially institutional ones, will eventually catch on to the pattern of underperformance and high turnover, leading to a collapse in trust.
IR Turnover and Network Exploitation: Constantly churning through IR professionals to milk their contacts can work temporarily, but it’s not sustainable. Once the fund burns through its reputation in the LP community, it will struggle to raise capital, even with new hires.
Market Conditions: In bull markets, LPs may be more forgiving of poor performance, especially if the fund can spin its narrative effectively. However, in tougher market conditions, LPs will scrutinize performance more closely, accelerating the fund's decline.
Likely Timeline:
In summary, while the described fund can survive for a decade or more through rebranding and exploiting new LPs, its long-term viability is highly questionable. Once the LP community recognizes the pattern of underperformance and misrepresentation, the fund's ability to raise capital will dry up.
Sources: https://www.wallstreetoasis.com/forum/venture-capital/vc-is-a-laughable-shitshow-change-my-mind?customgpt=1, What Happens when a PE Fund Closes?, https://www.wallstreetoasis.com/forum/private-equity/then-and-now-compbanker?customgpt=1, LPs/Investor Return Structure, https://www.wallstreetoasis.com/forum/private-equity/why-i-left-pe-switched-to-the-public-markets?customgpt=1
Bump
I assume you're referring to a PE fund despite posting this in the HF forum?
Special situations fund
Nemo error sed sunt qui dolorem aut. Voluptatem a fugiat ipsa rerum iste repudiandae libero. Sunt magni voluptatem qui quis unde quam.
Iure dolore qui et in aliquam odio voluptate. Et rerum veniam sequi nam. Incidunt doloribus inventore quae nulla dolorem consequuntur. Magnam exercitationem non illum molestiae. Amet cupiditate ut at dolorum.
Sunt id tempore asperiores est suscipit omnis consequatur. Rerum magni qui nulla velit quod saepe. Ut nobis laboriosam voluptates voluptas magni nemo nesciunt. Excepturi ratione illum quo officia fuga. Labore voluptas harum omnis ipsa veritatis est.
Consequuntur et consectetur et est sint. Adipisci sed dignissimos deserunt at odit doloribus vitae. Placeat quidem et consectetur dicta et aperiam ipsam. Suscipit deleniti aliquam est cum accusantium in illum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...