Hi All, I currently work for a middle-market PE fund and am recruiting for positions at other funds. My current fund is not performing very well and I do not want to end up in the same situation again. How do you go about evaluating the profitability of private equity funds you are considering?
So many of them have flashy websites and management teams with Harvard MBAs, etc. However in my current experience this doesn't always correlate to good returns.
I suppose I could evaluate the returns of any investments they exited and of course ask others in the industry.
Also what are your thoughts about size? Are bigger teams better when you are earlier in your career? Some of these funds are quite small (especially in the niche area I am in).
Thanks all in advance!
Ask for a PPM towards end of process behind an NDA. Ask for LP references as well.
Obviously getting LP references or a recent quarterly portfolio update would be the best bet. If you can't, there's a few tactics I gleaned from my recruiting a few years back:
If fundraising for a new fund is on the horizon (within 2 years), ask a senior partner who he expects to invest in the new fund. Are they LP's that invested in previous fund(s) or completely new LP's. If it's new LP's, the previous fund(s) likely did not perform well, and the fundraise will be arduous at best and fail at worst. Most existing LP's would re-up in a decently performing fund (doesn't necessarily have to be top quartile). Read their body language and facial expressions when you ask. You can lead the conversation here; e.g. Where in the country / world do you expect to travel to for fundraising? Did you go to that area frequently to fundraise for the previous fund? etc
Ask which portfolio companies have taken up the most resources of the group. When they give an answer, ask why. There's two main reasons a portfolio company will take up the majority of a PE team's man hours - it's growing quickly and needs support (roll up strategy, growth capital injection, refinancing debt, div recap, analysis for C-suite etc etc), or the investment is doing poorly and they're trying to rescue it. Try to glean which one it is and get a sense of the size of the investment. A large investment that is turning into an albatross is tough for a PE fund to overcome especially this day and age when returns are being bid down in competitive processes.
Ask how large they expect the next fund to be. They can lie about this, but if they come out and say that it's smaller than the last fund then they're basically admitting performance has been an issue.
Look out for professionals, particularly mid-level (VP, Principal), that toss in snide remarks about their team. Huge red flag if they insult the performance, caliber of their colleagues, or their experience in general.
Hope this is helpful and good luck!
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