Unique opportunity - advice
I am a late 30s analyst at a relatively large investment manager in MCOL city making around $500k per year. Married with two kids, wife doesn’t work. Lucky to have had an exit from a prior career in my 20s which set us up financially - house paid off and portfolio generates more than enough income to support our spending (though my goal has always been to aggressively grow our nest egg vs. retiring early). Status quo I love my job, investing is fun, WLB is great and the money isn’t incredible but is pretty damn good. The only downside is the city we’re in is far from our family and we don’t have a lot of close friends/reasons to be here. Ideally would like to move to my hometown where both our families live but it’s been hard to make that jump as it is a small city with basically no AM roles. I also would love to be able to invest in smaller/more niche opportunities than my current role permits as I think there is significantly better upside potential there.
Which brings me to today. A close-ish family member of mine is a very wealthy ($200-300mm net worth) former hedge fund manager, and over the years I’ve always shared interesting “PA trades” with him that are generally beyond the confines of what I can do at my fund (for geographic/liquidity/style reasons mostly). We’ve become quite close over the years and I recently talked to him and he proposed an idea that he would be open to lending me $10-20 million at the minimum allowable rate (around 4%) to start my own investment fund. The idea would be the give me the opportunity at all the upside for the nominal interest he’d get in return. It’s not a financial move for him obviously - other than he doesn’t need the money and sort of a way to leverage his estate to give me a shot at generating material wealth for my family and potentially turning this in to a real business down the line if I build a good track record.
To me, this opportunity seems like a no brainer. I can move closer to family, continue investing in a way that I have full control over, and have potentially significant upside if I can even get a modestly good return. I also don’t think I’d need significant infrastructure to invest - maybe $20-50k in annual costs for research/portfolio management tools from the brief research I’ve done ob it thus far.
My question is - is there something I am missing? I want to be mindful of walking away from a career where I’m on PM track to make likely LSD millions if things work out 5-10 years down the line, vs potentially pulling forward that outcome with lot more risk but also more fulfillment attached. Curious how you all would proceed? Obviously a unique situation where the cost of capital is significantly lower because of my close personal relationship. Appreciate any insight from those of you who have maybe had opportunities to raise small amounts of capital for a fun. I guess an equivalent question is if someone was willing to become an LP of yours and pay you above market fees on small AUM, would you walk away from your current role you like to do it?
Maybe this works better as a private fund or family office but this isn't legal advice.
Imo the numbers look more complicated than they need to be. If they are serious about being a seed investor ask for a more modest amount without the interest payment and incubate first.
Curious to see what people say so just a thought; you'll see as you consult with law firms but in general you'll want to pass through several expenses to your investors and that is more difficult if that capital is a loan. This doesn't include potentially managing margin on top of that. Depends on your structure but the loan could incur expenses you aren't considering.
If you want this to be a professional fund you'll want to secure a prime broker amenable to low AUM. Once you have a strategy that seems scalable then you can consider moving on to a fully registered fund structure afterwards so you can have more runway to sort out operations and infrastructure.
Thanks. Really appreciate the thought.
Yeah, he seems open to whatever structure makes sense, doesn’t necessarily have to be a loan. I think the goal is to find a way to front me money without tripping estate tax rules. The way it was going to be structured is me buying into an unused corporate shell he has with an illiquid land holding in it at a discount. Then he lends the shell $$ and the shell accrues value as I grow it. Not really a fund so I would try to figure out some mechanism to build a track record that provides the possibility to raise more money down the line (or not I guess if I’m successful enough I don’t need to take money).
One alternative is basically setting up a fund structure where I charge 1 and 20 (he said he’s fine paying me some modest salary to cover living expenses but wanted the real value to be in the upside I generate). So like say I earn 10% on $20 million, I get a $200k management fee and $400k of carry on that return vs $1.2 million of direct upside under the 4% loan structure (2m - 800k interest I owe him). The benefit of a fund structure is I’m not on the hook for the loan every year, the tradeoff is less upside to me I guess.
This is a fascinating opportunity, and based on the most helpful WSO content, here are some key considerations to help you evaluate your decision:
Pros of Taking the Opportunity
Risks and Considerations
Key Questions to Ask Yourself
Potential Path Forward
Final Thoughts
This opportunity is indeed unique and has the potential to be life-changing. However, it’s essential to weigh the risks and opportunity costs carefully. If you’re confident in your ability to generate strong returns and are excited about the prospect of running your own fund, this could be a fantastic move. On the other hand, if the risks feel too high, you might consider a more gradual transition to ensure you’re not jeopardizing your current trajectory.
Would love to hear how you decide to proceed—this is the kind of bold move that could redefine your career!
Sources: Millionaire by 30, Family Office Private Equity, Millionaire by 30, Family Office vs. Traditional LP Career Path, Fork in the road: Career path in Asset Management
It's a bad deal: to make it more aligned, ask him to be an anchor investor with 50% off of what you'd charge other investors, so something like 0.5/7.5 where he'd probably do better than the 4%. As a sweetner, you could also offer to give him 10-20% of all management fees of the GP for the X years if he agrees to a lock up of X years (3-5 for X is the norm) and agrees to be a reference for other FOs and HNWIs. These are just levers, the specific figures are what you negotiate. The lockup will also help you plan for the next 3-5 years.
The breakeven on running a fund @ 1/15 while paying yourself a decent salary in a L/MCOL city is likely $30-35M, so still a big pay cut from your $500k. Alternatively, you could run it as an SMA without the heavy fund setup costs.
If you aren't a hot launch/spin out of a large HF, then expensing fund set up costs will be hard i.e. a needless friction to raising capital, and also unfair because you're forcing your earliest backers to take on the costs.
If you want institutional capital, even for emerging manager programs, they will want to see a track record of at least 3 years on capital base of at least $500M so it's more like a 7-10 year timeline until you get institutional capital. I'd get the hard, written & signed LP commitments for at least $100m before quitting what sounds like a pretty good situation.
"opportunities to raise small amounts of capital for a fun [sic]" – I know you meant to say fund*, but raising capital is absolutely no fun. 100s of tire kickers, fake family offices, and unrealistic requirements for a startup HF or emerging manager. No institutional allocator or large-ish FO will take the career risk, and HNWIs are a PITA to reach and convince, and don't really seem keen on public equities for many reasons, some good but mostly irrational reasons but that's the world we live in and attempting to educate them is a waste of time.
If you still want to go for it, make sure that you and your family, especially your wife, can live on a tighter budget and discuss it all deliberately and slowly with your wife, and also time box your shot should you shoot.
Then do whatever it takes to get commitments in writing before you quit your job; next do whatever it takes to get to $100m aum ASAP even if this means charging 1 basis point/10 basis points and even giving away % of future fee income for Y years if the money is locked up because the social proof from having $100m+ AUM beats having a strong 5 year track record among allocators.
You don't need a "professional" prime, I know funds managing $200-500m still using IBKR, who let you use their platform with close to $0 AUM. If you want a "reputed" prime who can do some cap intro & lower end on AUM size e.g. BTIG, they'd want to see $75m AUM and somewhat high turnover, >20% per year.
Sorry - can you clarify how it’s a bad deal (and for who)? Seems like a very good deal for me. His goal is to seed me for low cost, not to earn a return for himself. If he could give me the money for 0% without it being deemed a gift he would. 4% is just the lowest allowable cost under tax law. Just a little confused why you’re saying I should offer him fees half of rack rate + profit share in the GP? Maybe see my above reply to the first commenter for some addl context on the situation.
Other than that, appreciate the advice. Super helpful.
Bad deal for both. He has to unnecessary estate planning gymnastics, you get a optically weak, fickle capital. If he wants to seed why not just be a simple LP w 1-2% fees? You don't have to offer fee sharing, etc. but it helps if you want to incent him referring you to his network. But if he's going to do that anyway then just charge him as a simple LP, so your alternative path would be way better.
well thought out advice from Two Ligma.
I would just get this person to invest in your fund. It is actually MUCH simple than him giving you a loan at "below market prices" embedded in some illiquid land vehicle. If he has any belief in you doesn't he want to be an LP? When you are raising funds you can refer to him as a cornerstone investor instead of having to explain that it is some loan arrangement.
On one hand, you'll get unparalleled exposure and responsibility. You'll likely be involved in every aspect of the business, learning faster than you would at a larger, more structured firm. Your contributions could be more visible and directly tied to the fund's success.
However, the downside is real. A small fund might fail, leaving you with less career momentum than if you had started at a well-known company. When it comes to compensation, the base pay may be lower, but the upside—your bonus and a potential share of the profits—could be life-changing.
Ultimately, you need to decide if you have the stomach for the risk and if the potential for a massive learning curve is worth the uncertainty.
How are you going to cover the 800k per annum interest fee on 20m when things dont go your way?
A bloomberg terminal is 25k a year and thats the bare minimum so your infrastructure costs are probably way too low.
Couple thoughts
- while I’d love to have it, I likely don’t need Bloomberg for the strategy, Koyfin or something similar probably works (doing LO in small/micro caps). Likely also would not have office space until if I decide to hire people
- biggest expense probably travel to meet with companies but would fly economy everywhere so keep it as cheap as possible
- just going to be me for a while, I may not even have the goal of raising outside money, just would like to set it up to where I have a track record so have the option to try; I have around a $8m NW including the house already, if I can get upside of high 6 figures/low 7 and growing with assets without raising outside money then I probably won’t try to + the strategy by its nature isn’t that scalable beyond $100-150 aum anyway in an upside case
- interest could be PIK potentially in down years. We’ve also explored structuring it as pref equity with 4% hurdle. Or alternatively the fund structure I outlined above which turns it all variable and solves the problem.
I think you have to think about the research that you need to run the fund and the intangible information that you get in your current role as an investment analyst at a relatively large investment manager.
A lot of brokers/service providers who were previously very nice to you when you are at a large firm, may no longer give you the same kind of research access / information / market color when you are at a small firm. There are still people who will help you out of goodwill and past relationship, but a lot of service providers are pretty practical and will drop you once you are too small for them to bother.
You may think that your strategy can run with limited broker resources. I just wonder if your returns or strategy might be impacted if your access to institutional-level resources is restricted.
This is complex and highly personal to you, of course. For context, I spent 20 years at a large HF where I was a partner and ran various business areas globally and built some wealth but not enough to stake myself $50+mm and try again. I retired at 40 but could not stay away; ended up launching a fund with a partner where we run ~$50mm and are 1/3 of the capital but have LPs paying various fees depending on lockup , size, etc.
I say this because we decided to this only after considering managing our capital privately separately, privately together, via external managers, and many other permutations. The bottom line was: we felt the discipline of having LPs would generate better results, that it would give us space to grow if we performed, and that the access to resources and general cost-effectiveness of the approach was far superior. Plus, we could pay ourselves while generating returns if it all worked.
As it relates to you then: the amount of money you're talking about really only gives you scope to get paid if you generate outstanding returns for several years without loss and if it sticks around. It is a quirky enough structure (and of a size) that it would make raising external capital difficult - and if I were giving advice I would say that raising external capital should be your goal. Finally the scale you'd be managing at would be burdened by fixed costs if you set up a robust structure but would not give you much access to resources - certainly nothing like what you're used to.
All that to say: Be very aware of the drawbacks on the way in if you decide to go ahead. It can still work, goodness knows there are stories of people starting with less and becoming fantastically successful. But those are rare. And you'd be signing up for a genuine uphill battle. Ours has felt that way for sure, and only now five years in do we feel like we are humming.
Good luck - think carefully about it and what is meant to happen, will happen!
Thanks very much. A lot to think about.
I am leaning towards doing it for the following reasons:
I don’t know. I think I will regret not taking a chance to bet on myself and improve our personal living circumstances. I am not looking to become the next Bill Ackman here… I feel like $20m is enough to keep the lights on, pay me decent money if I put up good returns with potential for upside if I eventually raise, and get more fulfillment from this path. I am probably naive but I think a blind confidence is sort of required to even attempt it. But your points are definitely well-taken. Appreciate you taking the time.
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