In the last ~5 years, it seems like there have been a lot young(er) Partners from established funds spinning out to start their own MM/LMM funds. I understand from the vantage point of the Founding Partners and their motivations to spin out (e.g., getting pushed out, wanting more economics, etc) - I've worked in PE (but not anymore). This is my point exactly. How are these new funds really supposed to differentiate, and generate better returns compared to more established funds, especially those with operating resources to bring to their portcos (e.g., HIG, Audax, LLR, etc)?
I see more and more MM/LMM PE firms investing in their firm's operating resources (operating partners, internal consulting teams, advisers, etc) to try to be more hands on with their portcos, and those resources/expertise can definitely be beneficial to middle market businesses. But it's much harder to have the same breadth or depth of operating resources as a new fund.
To be clear, I'm not at all knocking on their pedigree, investment acumen, etc. They obviously have impressive backgrounds to be able to start new funds and raise money from LPs. I'm wondering how can they actually consistently invest in such a better way than all the other PE firms in the market now (i.e., what are they telling LPs to convince them of their unique strategy when most came from relatively similarly impressive backgrounds)?
IMO its a principal-agent problem.
Young partners aren't spinning off new funds because they think they have a right to beat existing firms; but rather because all the established firms have entrenched seniors with the economics locked up.
From that perspective, it makes much more sense to start their own fund where they own a majority of the economics.
Just my $0.02, I'm an intern.
Connections, looking at more niche spaces/more niche expertise, unique ability to gain deals in a certain geography, some proprietary sourcing method, unique strategy. Again as you mentioned the industry is being more commoditized these days, but there's always going to be a higher bidder and/or someone who has a unique take on the business as well. Ultimately, businesses aren't all that binary so you can get fairly creative as to how to go about operating them as a PE owner and thus can have differentiated views. As a first-time fund founder, you are betting you can do that for enough businesses the bigger names aren't looking at, which btw isn't too hard because these newer funds typically have much smaller check sizes than those institutionalized names and thus don't face competition from them.
It’s all about economics. Old guys at established funds remain as long as they want. Why wouldn’t they? They own all the economics and can delegate all the work.
This is why there are 9k PE funds out there.
Just going to piggy back on some of the above posters without regurgitating what's already been said. Couple other advantages to these MM fund that come to mind:
- Sometimes it's more efficient to manage a smaller MM fund in the sense that there's fewer dollars to try to chase deals for. Just a few good deals can net you a solid 15-20%+ IRR vs. when you're managing a multi-billion dollar deal at a MF, it takes a lot of large deals to generate comparable returns. Not always, but sometimes it can be easier to generate excess returns when there's fewer dollars to worry about deploying / managing.
- One thing that these guys can offer too once they leave [Insert XYZ MF] to start [Insert ABC MM fund] is they can offer more competitive return preferences to LPs in the form of either higher senior pref return, or a lower management incentive (since they have presumably less overhead). So they can compete on fees too instead of returns. This is more common among new first time funds that they'll give better fee economics to LPs - one thing I've seen at some funds is the GP (fund manager) has a smaller AUM fee (% of AUM fee) with higher management incentive so the LPs end up paying very little in fees until they get their preferred return.
Nam in distinctio ut inventore. Aut eos aut dicta incidunt. Exercitationem eos qui autem.
Eveniet architecto necessitatibus est cupiditate. Quo corporis et numquam autem. Officia ipsum est laudantium autem incidunt harum ipsum reiciendis. Nihil nihil repellendus qui assumenda. Commodi voluptas velit quod accusamus alias nesciunt. Architecto aut nisi fugiat.
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...