How are PE funds started?
Ok this may sound as I am dreaming or looking too much in the future, but I was genuinely interested in knowing how to start a PE fund. I know it's not a reasonable goal (maybe).
How do the founders decide to start a fund and raise the capital? What's their usual background?
I read Schwarzman's autobiography and I feel like he skipped some important parts in the beginning. I am Italian, so I also read the biography of a PE founder from here, but he comes from one of the richest families in Italy so it's not very relatable.
I am finishing my master's degree and I will start to work in IB after the Summer, but I want to build my career around the future goal of starting my own fund. Obviously in the next few years I plan to move to an analyst position in a PE fund, but then? Maybe also making some corporate experience in a specific industry would be a good idea to then start a fund that invests in that industry?
What are your thoughts? Should I stop thinking about it?
https://www.wallstreetoasis.com/forum/private-equity/how-to-be-king-of-…
Currently working at a family office and we frequently come across emerging managers / first-time funds, so I'll take a crack at it.
Very often, first-time PE fund managers are spinouts from a larger and usually well-established platform, for primarily two reasons:
1. They are currently Principals / Junior Partners at their current fund, and do not see a clear path all the way up the food chain. They wish to start their own firm, something that is their own so that they can hopefully build a firm where they have and will accrue the lion's share of the carried interest in the future.
2. Major disagreement with leadership at the current fund. Could be differences in opinion, strategic direction, or just downright a falling out - they could even be part of the founding partnership at the previous firm.
Very often, new PE funds start off as fundless sponsors, which means doing buyout deals on a deal-by-deal basis with other investors to build up a track record, before raising their first blind-pool fund with a substantial amount of capital (for a viable sum, usually between 150-300m).
Honestly, it will not be until probably 15-20 years later until it might make sense for you to try and start your own fund even. You would have to be at least at Principal / Junior Partner level at an established and reputable private equity firm, and have a strong track record on past deals delivering strong returns that is attributable to you. Potential LPs will not recognise deals that you did as VP even if they were home runs, because it very likely was not a deal that you sourced, underwrote and managed to a realised exit by yourself.
Even if you tick all the boxes (established track record attributable to you from a reputable firm), it is still extremely difficult to fundraise. I would say fundraising is probably the single biggest challenge for new PE funds - LPs are generally risk-averse, and no one is going to back you early on unless you have been a rockstar at your previous firm, or have a good track record as a fundless sponsor. You read Schwarzman's autobiography, and so you would know how even Blackstone had lots of difficulty fundraising as a firm just starting out in the 80s. My firm is seeing funds with key men that are exceptional and have strong background, track record and acumen, but are struggling to hit 200m on their first blind-pool. To put it bluntly, lots of LPs would rather back TPG / Carlyle / whatever big fund even if the fund ends up mediocre, because they can hide behind brand names.
Finally, there is a hell lot of personal financial risk involved in starting your own fund - there is the GP commitment to the fund to consider, and including admin costs, paying yourself a salary, fundraising expenses, and so on you could be looking at 7 figures upfront before anything gets off the ground. It would truly be an entrepreneurial endeavour, and would be just as difficult as starting any other business tbh.
TLDR - focus on working through your career first, and then consider (and re-consider) again if this is what you want to try out. It's not that it's an unreasonable goal or a pipe dream, but it would be a difficult path to choose especially if you end up being established at a PE firm and having good amounts of DAW - you might end up thinking it is not worth the hassle to venture out, as a lot of people eventually decide.
Have you seen people accelerate this process? I.e., leave as VP following top BB/MF rather than waiting until principal level; scale past 300m after 1-3 fundless sponsor deals? APAE also curious of your thoughts / if your network suggests anything that runs counterfactual to what berutoruto said
I'm sure it happens, but what I have seen happen more often is that the VP from the top MF comes out and becomes a Principal / Junior Partner at a new firm alongside a more senior person. That VP would then be in a position to have a larger carry allocation + grow into a Senior Partner role in a few years.
So yeah as a VP it would be pretty unlikely that you would be the main guy at a new firm, unless the VP is well-connected enough to have a base of family offices / HNWIs and / or have family money to do deals as a fundless sponsor for quite a few years first. There was a mid-market buyout firm that we invested in recently where the founder started his firm right out of MBA more than 20 years ago, and just started doing deal-by-deal for close to ten years before raising institutional money. Another buyout firm we evaluated recently had absolute rockstars start the firm around 20 years ago, and even their first blind-pool was sub - 100m (although that was in 2006). It took them 15 years to scale to a fund size just under 1bn, though there are other firms which have scaled more quickly.
Anyhow, the VP would have to start small, and probably be much more operationally involved in PortCo management than previously at a MF with more support. At smaller deal sizes with smaller companies very often the sponsor has to get involved more to fix HR / CRM / IT systems and deal with general small business BS (family interference for family-owned businesses, difficult employees to work with, etc.)
Above answer is spot on, just adding on to say the industry is very old-school. Very few people are going to fund a 30-35 year old who just came out of VP even if they think they have a differentiated strategy. If the firm goes upside down they look like a fool.
Interesting. How come MF PE investors who have focused on large cap buyouts are able to successfully setup new funds which naturally focus on much smaller deals? Their skillset, network and expertise is managing larger transactions which are quite different to smaller LMM deals (in both execution and deal sourcing).
Why wouldnt their be a much larger bias towards smaller less brand name / sizable funds in the LMM space? Would it make sense to build you career at a large fund and then strike out on your own or to join a fund thats already doing smaller deals?
I have a few friends that have started LMM and MM size funds. Most did the traditional PE thing then left once they had 15 or so years of experience and slowly worked AUM up over time. I know a few guys with chunky exits that used proceeds to boot up funds. Either works but for the later you need $50m - $100m.
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