Just curious, anyone have good numbers around how fast various PE firms have scaled? How fast can you really scale AUM?
Seems like you're somewhat limited because of time to deploy funds + seeing how fund 1 plays out directionally before you can realistically raise fund 2?
Makes me wonder if you could actually scale AUM much faster by being an independent sponsor that buys companies with internal capital then resells a chunk of equity in existing deals to LPs? That way you aren't waiting around for 3p LPs to make decisions and you can keep moving up market fast.
For example, if you raised a $100m fund 1, you need to deploy into the same size range, roughly, because that's what LPs want to see.
As an IS, you could do one smaller deal -> scale size on each subsequent deal and get to bigger avg deal size faster -> deploy more $
Any thoughts?
Look at Clearlake and see how they scaled. Probably best example
or thoma / genstar
Any chance you can elaborate more about Clearlake and its fund structure?
Independent sponsors are constantly waiting for LPs (or really prospective LPs) to make up their minds because they have to fundraise for every deal. So as frustrating as raising a fund is, it can be that many times more frustrating to raise capital deal by deal.
If you have a fund and want to start buying larger assets in order to prove to LPs that the next fund should be larger and you can successfully deploy a bigger fund, you can just hand out a ton of coinvestment so that your fund can act 2-3x its committed size.
The previous commenter is spot on that Clearlake is the poster child for how to scale AUM quickly.
Yep, and you can also lose deals because your financing might be perceived as less certain, which can lead to another buyer being chosen over you. Funds also don't have to raise again for add-ons, if that's part of the strategy.
But you're right that fundraising over and over again is probably the biggest headache.
Interesting
Agree with the poster who said you typically do this via co-investment. It's a challenge doing this in an independent sponsor model, but I know people try to do it this way.
The challenge with an indy sponsor model is that you need each investment to actually hit the stated metrics because you have no additional capital lined up, one bad investment can set you back years. You also are inherently limited in the speed in which you can deploy capital unless you have someone to backstop you until you raise the equity because LPs don't always move as quickly. Additionally, even if you have some sort of separately managed account or pledge fund that's "soft committed", they can still self select out of certain deals.
That being said, indy sponsors don't have fund concentration limits and tend to recognize carry on a deal-by-deal basis, which means if you do it successfully you COULD scale really quick, but usually not. Also, doing big deals requires a lot of portfolio management, and as someone without committed capital, it takes a lot of overhead to build out a team big enough to manage a portfolio scaling that quickly. I think if you're going to go this route, you go the indy sponsor route as someone with a significant amount of investable capital (i.e. quasi-family office doing PE deals before raising a multi-$B fund) like a 26North.
Thanks for the thoughts everyone. Please keep them coming!!! Great points so far!
Del but true
You have always struck me as someone with actual operating insight. You know how rare that is. Presumably this is the engine of the success that's powered you to the point you're interrogating the smartest structure to harness external capital in your deals.
The points already raised about concentration risk (one lower-performing deal hampers your ability to move on to the next one) and the challenging economics of creating a team of the caliber that supports you pursuing a more ambitious next deal without recurring fee revenue are both correct.
I have found that at some point in life there are expiring options to win big by betting on yourself. If you do truly know something that other people don't, failing to act in light of your alpha is stupid.
In practice, this might mean that if you take $10m off the table in one deal, you use that money in a way that defies conventional logic.
You know how to find another deal where your $10m is the equity check for a $25m EV asset, how to run that asset for a couple years where you refinance or monetize to a to a third party and get your money out while retaining ownership, and how to market that track record to one-off capital partners who frankly aren't big boy checkwriters.
What if you took $5m to build a truly stellar team of heavyweight professionals, then used the other $5m as a GP commit for a big deal? At 2%, that's a $250m equity check you want to raise; at 3%, $165m.
To be clear, I'm not advocating for pursuing the largest deal you can find. If you feel your edge exists in a specific lane, stay in the lane. I am highlighting the potential attractiveness of spending money on the people and resources that will let you play in a different league. It's not an investment you can measure an equity multiple on easily. It's an investment nonetheless.
Basically, considering building a firm with your own principal capital (fund the GP expenses yourself), because if you're good, the return you get on that can be so much bigger than it is for other people. Most people make these investments on a lagging basis. Making them on a forward basis can pay off handsomely, regardless of whether you choose to pursue consecutive deals in the fundless model or pursue raising a pooled vehicle.
Very helpful as always.
I like the idea a lot. It's similar to something we've been throwing around internally, and like you pointed out, I think it plays into our strengths too.
This makes a lot of sense if the goal is to maximize value in the medium term to yourself, but the drawback is that LPs will only give you partial credit for big winners when there’s no institutional capital invested. It’s great, you’re rich and all is well, but when you try to scale to institutional scale it’s an uphill battle because LPs only have your self reported numbers to go and there’s nobody who has made money with you to vouch for you. Meanwhile you spend all this money trying to be institutional for scale that isn’t immediately achievable
Buying investments first then reselling to LPs is fraught with issues because presumably you found a diamond in the rough to commit sizable personal capital to. Isn’t it fundamentally unfair to yourself to let others in at cost (+hurdle) when you’ve already borne some of the risk? Is it fraught with conflict and unfair to mark it up and well to LPs? Do you mark it to a level where you leave money on the table? Do you mark it at “fair value”, and what happens if the market then moves against you and it turns out to be expensive for LPs? At the core you realize basically that investors in the short term only take potential upside away from you and are you happy with that?
Lots of traps in that approach that you don’t appreciate fully until you try it.
If you are a first time fund the LPs in Fund I have, generally speaking, signed up for Fund I and Fund II. Provided you stick to your mandate they won't pull for Fund II. Fund III will require some sort of exit to point to in general. At least that has been my experience.
Being an independent sponsor and doing deals on a one off (an SPV per deal), will be SIGNIFICANTLY more work as you have to constantly go back to LPs to kiss the ring etc. You will get LPs that like one deal but not the next and some that ask a million questions and end up not coming in. You may have the patience and willingness to do it this way but it is exhausting.
I think the dream is to find a like minded single LP to fund some deals upfront to get a track record that you can then go parade around to a longer list for Fund I.
How many deals does an IS need to do before the dog and pony show that is fundraising for Fund I
Depends on founding team's prior track record and experience before they started as independent sponsors. You can completely skip the IS stage w/ the right background.
I don't know, that is probably highly dependent on background/experience and strategy. Probably a handful? 2-4?
Totally, that LP experience has been my experience so far..lol. So finnicky.
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