Why do top VC firms and Hedge Funds hire so frequently from MFPE?

Hedge Funds and VC Funds like Tiger Global, Viking, Lone Pine, etc. are largely made up of people with MFPE backgrounds. I get how the people who worked as analysts at Blackstone PE are probably the most gritty, intelligent, and qualified, but why do these funds that like to focus on pre-IPO growth companies or public equities like to hire from PE firms? I'm sure the skill sets are largely transferable, but fundamentally PE is concerned with cashflow + EBITDA + debt, and it is incredibly process-oriented; meanwhile, Hedge Funds have a much quicker time horizon and VC firms are more concerned with revenue growth. I know these are generalizations but why don't the top VC firms hire mostly from VC, and Hedge Funds from Hedge Funds?

Why is PE considered such a great training ground and pipeline for all types of investing? Other than pedigree, why doesn't experience play a larger role? Why is Tiger Global filled with Blackstone alums but doesn't take many people from the Sequoias and Y-Combinators of the world?

Comments (17)

  • Intern in IB-M&A
Aug 4, 2022 - 11:08am

The premise is wrong. You're making the assumption that someone at A16Z, Sequoia, Founders Fund, etc. want to leave their job. Tiger Global, Coatue, Dragoneer, etc. are the "Gold Standard" for HFs not VC. Same way that Insight/TA/GA is more desirable for growth than BX Growth, KKR NGT, or Bain Tech Opps. If a VC investor reached the top of their industry (a16z, sequoia) why would they leave? I think that Tiger would have a very challenging time trying to poach a partner from their cushy multi-million dollar VC job in sillicon valley to come to a rough cut-throat environment in NYC.

Edit: To address your other question. The reason why PE is desirable to hire from is just the nature of the work and the skills are transferrable. In PE you learn how to a deep dive into the interworkings of a company and you learn how to think about a business. That skillset translate to every type of investing. HFs for legal reasons can't get as granular as a PE investor and the depth/breadth of information isn't available as a VC investor.

Also, non-competes. You aren't going to see people hopping from firm to firm in VC and HFs as often due to stricter non-competes

Aug 4, 2022 - 11:26am
tigercub69, what's your opinion? Comment below:

Thanks for the reply! You raise some great points. With Tiger/Coatue as the gold standard for hedge funds instead of VCs, a similar question still remains. If hedge funds cannot get as granular as a PE investor, shouldn't they look to hire people from other boutique hedge fund shops over MFPE firms? D1 is littered with Apollo, Silver Lake, and Blackstone guys -- everyone seems to have started in PE. Why is PE always seen as a stepping stone for HF, and never really the other way round?

  • Associate 2 in PE - LBOs
Aug 4, 2022 - 11:42am

Easier to go from privates to publics vs. the other way around. In both jobs, you're taught to think critically about the fundamentals of a business. However, private equity has the added element of process, legal docs, portfolio company management, etc. So it's much harder for someone with a bunch of experience in public equity to translate their experience into a comparable role at a private equity firm. For example, if you have a mid-level Analyst (3-5 years out of banking) at a Tiger cub or another hedge fund, they are likely not getting a post-MBA  role at a MF b/c the skill sets are so different. At the same time, the mid-level Analyst from a HF wouldn't want to go to a lower role b/c the economics don't make sense. Separately, you rarely see post-MBA folks at MF go to Tiger cubs because the path at their current firm might be better economically on a risk adjusted basis. As such, there is almost never cross over once you get a few years out of the 2+2 path. If I were a VP of Principal at one of the MFs making 600k-800k with carry and clear line of sight to $1mm+ cash comp and incremental carry, why would I ever move to a seat at a Tiger cub where my payout could drastically be variable (unless you think you are the outlier and can blow it out, but to even get tot hat position, it'll be a couple of years). PE folks are generally risk adverse. They went to the best banking program and schools and unless they have a genuine passion to do public investing, there isn't a lot of economic benefit in switching paths. I would argue a lot more fortunes have been made in PE vs L/S equity (both at the very top and the levels right below it).

  • Analyst 1 in IB-M&A
Aug 4, 2022 - 5:27pm
:

In both jobs, you're taught to think critically about the fundamentals of a business

And then you proceed to write about Tiger and Tiger cubs LOL

  • Intern in IB-M&A
Aug 4, 2022 - 12:00pm

Yeah, what I was trying to get across in my post above was that PE makes you overqualified for a HF seat, while just having HF experience makes you just qualified. The level of due diligence that you do in PE is much deeper than at a HF. Yes, a HF analyst that started his career at a Point72 is qualified to jump to a SM HF based in public market experience, but the PE investor has the DD experience of a HF investor and some.

The idea is that everything a HF analyst can do a PE associate can do, but someone who started at a HF cannot do what a PE associate can do. Having PE experience overall just makes you more insightful as an investor and you can read between the lines and sniff of BS in 10-Ks and earnings call.

  • Associate 2 in PE - LBOs
Aug 4, 2022 - 12:06pm

I disagree. I don't think PE investors are necessarily smarter or better than HF investors. They are just fundamentally different jobs so it doesn't make sense to say what PE does is any harder than what a HF does. 

  • PM in HF - EquityHedge
Aug 4, 2022 - 3:55pm

I can't speak for other industries, but for HF: 

1. MFPE provides a high quality pool of candidates to pick from (top students, top banks, top groups within banks, top PE funds). 

2. MFPE provides really good training (intensive modeling, deep due diligence, long-term investment perspective). For HF, modeling is very important. Not going to get that from a seed or early-stage VC (I did early-stage VC before bschool and did not get a lot of credit for the experience because HFs thought it lacked analytical rigor).  

3. At the junior level, top HFs like to hire people who are blank slates (someone coming from another HF might have "bad habits" that are difficult to retrain). 

4. Most people doing the hiring at HF came from this background, so the cycle repeats itself. If it ain't broken, no need to fix it. 

  • Analyst 1 in IB-M&A
Aug 4, 2022 - 5:33pm
:

If it ain't broken, no need to fix it. 

With Tiger down 50%, wouldn't you say that it is, actually, broken? Most SM investors coming from top banks and top MFPE proved to be mouthbreathing retards, probably because they followed the traditional BB IB -> MFPE path and never had to think by themselves, hence never developing any contrarian mindset that would have helped them avoid going all-in on absolute shitcos.

Aug 4, 2022 - 7:35pm
tigercub69, what's your opinion? Comment below:

Tiger's horrible returns is partially what prompted me to write this post. They are hedge fund but a lot of their investments are Pre-IPO, and it's not uncommon for them to lead Series A investments. Hence I found it weird that have a high propensity to cash flow and EBITDA experts from MFPE when they will end up looking at such early stage companies. A lot of the reasons given in this thread is that the deep due diligence in PE is helpful, but seems like Tiger outsources a lot of their DD to Bain. Curious to see what happens next. I also agree that this system might be broken, but I'm just curious why it was ever so wack in the first place. 

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  • Analyst 2 in AM - Equities
Aug 4, 2022 - 8:52pm

I'm shocked at how much people on here overstate the importance of modeling in the real world. Shocked. Guess what, the market does not give a fuck about your 50-page bullshit excel model. The private equity guy is the exact opposite of what a public equity investor should be. 

As for your question, Tiger cubs hide behind their brand. Literally. That's why they're named tiger cubs. They live and breathe off their brand. Hiring a Harvard + GS + BX analyst adds to their mystique. In reality, they're a bunch of mediocre "investors" swimming naked. 

Only hedge funds obsessed with brand hire from MFPE. 

  • Analyst 2 in IB - Cov
Aug 4, 2022 - 11:58pm

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