I've been networking with a very small fund that is attempting to 3x their current target fund size. From what I gathered it's gone from $10m to $20m and now targeting $60m with ~$35m already raised. This has been over about a 12-year span. I'm curious how realistic it is to grow a smaller shop to the size they desire? Also, is it entirely dependent on stellar returns (i.e. achieving at least 2-3x returns)? The Firm has less traditional backgrounds leading it but a very good regional reputation and I'm hoping to be apart of the growth, however, I want to have a realistic expectation going in. Please feel free to share your thoughts and ask any questions that may be helpful.
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Thats so tiny. How did they live off of the management fee of the first funds? And what kind of deals are these?
I think the main scaling consideration would be the LP mix. They were likely just HNWs for the first funds, and if the growth requires them to add either (a) 40 new LPs writing $1mm checks, or (b) institutional capital (pension funds, endowments), there could be some back office/ops growing pains.
Secondly, do they have the dealflow to support a bigger fund?
Great questions. I should have stated that they also have an IB side as well and this has generated a lot of the Firm's revenue. From my understanding it is a lot of HNWs and also operates as an SBIC fund for the time being. There are a couple big LPs in the area that I think have written small checks to their fund, but have participated in much bigger coinvestment deals, so that may be their thought process for being able to ramp up to a much larger fund? I just wonder why they haven't written larger checks to the main fund yet.
Everytime I ask it sounds like they constantly have a pipeline of deals, but it has been a while since a new investment has been made.
Bumping to hopefully start up a convo!
The critical question LPs and potential LPs will ask the fund is are their returns sustainable at a different scale.
People hit the fundraising trail with a pitch on why their investment approach is differentiated, and point to historical examples of how that approach led to solid returns. The fund you are asking about will need to convince LPs that (1) their playbook that worked for companies that make sense for a $10M fund will also work for companies that make sense for a $60M fund and (2) that they have the connections necessary to source companies at a bigger scale.
With the amount of PE demand out there at the moment, lots of people have been successful with this pitch and upsized their funds.
Appreciate your thoughts! I'll push more on their ability to source bigger deals because it has been a while since they closed on a new investment and frankly I'm not sure if they have the network or not to step their investments up.
They're thought regarding the LPs is to entice a couple of their institutional LPs with much lower fees on a bigger coinvestments ($25m - $50m deal) which will demonstrate they can scale and hopefully result in writing a bigger check in their next fund raise.
Not worth the risk. PE is a winner take all game. Scaling is extremely slow given fund lifecycle - almost an impossibility that it would a rocketship in terms of scaling given they're sitting at $20M.
Better start at the biggest fund you can and switch to a higher role at a smaller fund later.
It seems like this point in time has been the smoothest transition for smaller funds to double or triple fund size. My reason for considering it is that I have a pretty non-traditional background so this would essentially be my one and only chance cracking into PE, which is my ultimate goal.
I think you're falling for the PE glitter over anything. Joining a $20M PE fund might be a worse career trajectory than going to work for Walmart or a large corporation. Your career will arguably develop faster at a big corporation, or at a startup with solid business fundamentals (Coinbase, Robinhood, something like that).
Hmm I could potentially understand your point coming from the worst case scenario. Hear me out and I'll be interested in your perspective. They're currently at $35m of their target of $60m so they are demonstrating fund size growth and past success. As someone currently in fp&a, it seems like there would be little to no career risk, since a failing fund wouldn't be held against me as an associate and I get the opportunity to round out my experience in finance which could arguably make me a more appealing candidate to the startups you mentioned. It is probably a safe assumption that those companies are mainly hiring people with IB/PE backgrounds anyways. I'm failing to imagine the issue that could occur with career trajectory, since PE experience is usually considered desirable.
$60M is still nothing.. Blackstone is sitting on $545B. So these guys AUM is roughly .01% that of Blackstone.
Again I am strongly of the opinion that Private Equity is a winner take all game. As a career decision I would most certainly pass on the $60M fund and aim to go directly to a startup or better role than the one you currently have at a larger organization. The PE experience you gain at the $60M shop will be mediocre at best (odds are the partners are gonna monopolize IC and give you the most menial of tasks since you don't need more than 2 people to run a $60M fund).
In addition, anyone with legit IB/PE experience in corp dev will see through it and hire MF/MM/LMM guys over you.
Also don't fall for their marketing. Targetting $60M doesn't mean they can actually raise $60M. I've seen plenty of shops that have targetted $50-100M funds and only gotten ~$30M repeatedly (every time saying we are targetting $50-100M).
You should have a better understanding of their source of capital - family offices, institutions, etc. My guess is it's HNW and family office if that.
Also I am betting they're not even an SEC registered investment advisor (need 50M to 100M AUM depending on state) so yeah I would def pass on them.
Joining a $35M fund betting that it will scale is like going to Pima Community College because the brochure said they are scaling and might be the next Harvard.
I appreciate the perspective and will dive deeper into the reasoning of their expectations. There is obviously risk but the potential upside needs to be properly weighed into the decision as well. I understand you're talking about PE but you could say the same thing to any number of startups that are now bigger than anyone expected. I'm not saying that will happen to this small fund but with decent performance and focus on LMM in underserved areas, I don't see why it couldn't 2x-3x its fund size which would reap massive rewards for an associate level person who was involved prior to that growth.
I haven't seen Blackstone's or other megafunds performance, however, with that much capital I can't imagine they're attaining far superior returns. I would think they're mostly equivalent to index funds for PE that LP's want to get in for asset allocation/diversfying purposes rather than outperformance.
Even assuming out of the ballpark returns - best case scenario you triple fund size every 5 years. So if they are at 60M right now, let's assume they will be 180M in 5 years, and 360M in 10 years.
No let's do revenue calculation assuming 2/20 fees (which they might not even be able to charge cuz they're so small). We're talking 2/20 fees on 60M for the first 5 years which would amount to $1.2M mgmt fee + $3.6M performance fee, assuming 30% returns/IRRs, for a grand total of $4.8M in revenue. For the next 5 years, it would be 3x that = $14.4M in revenue.
Now assume overhead of 30% on all revenue and that partners take 50% of the revenue before disbursing the rest to employees, and the residual comes out to $3.84M in residual revenue over a 10 year time-span split between you and others who weren't the founders/partners. Pretty grim if you ask me.
I don't get the sense that you understand how private equity fund lifecycles work. Because you have to wait 5-7 years before raising a new fund (in order to show your investors the performance of the previous fund) it is extremely difficult to scale. And even when firms do scale, they usually target doubling thier fund size, not tripling it like I did in the above flowery example. So by the time these guys are at 120-180M, Blackstone will be over $1 trillion AUM. So not only are you not scaling, but you are also falling further and further behind on a relative basis.
In contrast, Facebook made a modest $382,000 in revenue 2004, $9 million in revenue in 2005, $48 million in revenue in 2006 and $153 million in revenue in 2007.
Idk if you read my other comment on this thread but they also have an IB side that currently generates most of the revenue and the PE fund they run only has 4-6 people solely dedicated to it right now so those economics are still pretty attractive given its a lean team.
I would counter your lifecycle point with my sense that you aren't thinking outside the box regarding much larger coinvestments they could (and plan to) offer through a side vehicle which could generate a meaningful portion of carry.
It sounds like you're pretty risk averse and lack a certain sense of hunger that most people with an unorthodox background typically have when wanting to crack into IB/PE, which is fine if you have the pedigree and optionality to work for a KKR or Carlyle. However, as someone who focused more on baseball in college and learned about these fields after I entered the workforce and have no desire to get my MBA, this seems like a relatively rare opportunity. I do appreciate your insights and they have given me more questions to ask but if a reasonable offer were to be I couldn't imagine the what ifs I'd face later in life if I didn't take the chance.
I started at a sub $100M fund and in ~5 years we've now close to $1B in AUM. I've seen how a small fund can scale to a mid size one.
I understand the point that Achilles is trying to make, but he's not 100% correct and sounds pretty ignorant on PE in general. I do think that there are cases in which joining a small fund is a good opportunity and the "zero sum" argument he is trying to make about private equity is entirely untrue. The reason LMM PE exists is because there are significant inefficiencies in small companies that are overlooked by larger funds who can't write small enough checks to invest in these types of companies. This is why you've seen the rise of so many micro PE funds over the past decade or two. If your expectation is that this fund is going to be the next Vista Equity or something like that, then yes, I think Achilles makes a good point. I can't think of an example of any massively successful fund that is ever slow out of the gate. They're usually started by ambitious, world killer types of guys/gals, who really want to go big. At the same time, there's nothing wrong with a modestly growing fund, it's just going to be different. If you have the right mindset going in, I think it could be an interesting opportunity.
With regards to how funds scale up, it's simple in theory and difficult in execution. Essentially a fund needs to have a thesis that they think can scale, they need to start in the LMM, do a bunch of successful deals, and basically just show a strong track record of success regardless of deal size. All of our early funds are well over 3x net. They're on small checks and small funds, so I understand that it's a completely different world to be getting even a 2x on a larger AUM, but when pitching to LPs, the only way to break into the larger fund sizes is to essentially say "Hey I've got this thesis, I know it can scale, look at how well it's done so far, we're way outperforming the market, yes the fund is small but I guarantee I can do the same thing with a larger fund, do you really want to miss out on the next *insert UMM/MF name here", why don't you double your commitment, etc. LPs all want to show their boards that they're allocating capital well and it reflects well on them if they can claim they spotted the next landmark fund. There's FOMO from bigger LPs and smaller ones can't get access to big funds, so their options are limited and they're more likely to back a fund with less of a track record.
Again, this is all in very simple terms, but that's the rough shape of how it can happen. Long answer short, yes, it is about stellar returns and ideally in a short time-frame. Returning money at scale is a big part of succeeding in PE. It's harder to turn $1B into $2B than it is to turn $100M to $200M, so the bar for a smaller fund is even higher. We were deploying our capital/re-raising in ~2 years.
The challenge is that most of the time, the strategy of growing a small businesses doesn't necessarily apply to a larger one. Not to mention finding deals becomes much tougher, as there are far more businesses that have a few million in revenue than there are ones with $100M+ in revenue. So funds can often times hit a ceiling and either decide to shut down, or just continue to raise the same size of fund and go after the same market of businesses forever. You'll see a lot of VC funds that don't want to expand beyond doing early stage stuff, so they just raise small funds every few years. It's great for anyone that has significant carry, for juniors, it'll never be lucrative and it's unlikely there's much room to move up.
In your case, the fund seems to be on too slow of a trajectory to really be that exciting. That's not to say it's not a great lifestyle fund for the few people that are at the firm, but $10 --> $20M-->$60M over 12 years is really slow, especially given that we've been in a massively bull market for the past decade. Valuations have been through the roof, fundraising has been easy, etc. It's concerning that the partners haven't been able to deploy capital more quickly. It either means the thesis isn't great, the partners aren't that experienced, deal sourcing is poor, or maybe a combination of all of those things.
Now for my silver linings, if they do have a new fund, you're most likely guaranteed work for at least a few years. Worst case, you invest in some bad deals, it becomes clear they aren't going to be able to raise another fund, and you can hopefully jump ship with some decent LMM PE experience. Also, if you have a non traditional background and this is a regional shop, you might not have many better opportunities to get into PE. Plus, PE doesn't always have to be about massive deals. If you find a good mom and pop $2M business, buy it for 2x revenue with some seller financing, grow it to $4M over the course of a few years and sell for 3x rev, you've now sold a business for $12M that you've maybe put $3M into. If you learn LMM PE really well and can rinse and repeat on that a few times, you could have a great life.
Last thing, I would have a conversation with the partners and ask them about the fund. Who are the LPs, what has their investing cadence been? Where do they see the fund going? Do they want it to become a $1B fund? What is the plan to get there? How are they finding deals? How long do they think it will take to deploy the $60M? When do they think they'll need to adjust the investing strategy if ever? What are the opportunities for a Junior? How are the economics going to work?
If you get a decent cash compensation with some equity, I don't think it's a bad gig. Just know that it might not be a forever home and your exit ops aren't going to be to KKR or Apollo.
Anyways hope this helps, sorry for the long, stream of conscious post.
First and foremost, I really appreciate the insight. This is exactly the advice/perspective I was hoping for.
You raised an excellent point with the lack of massive funds that started out this slow. I think that would be interesting question for them to address just to figure out why their fund sizes have progressed so slowly in such a favorable environment. My only guess is that the partners were much more dedicated to the advisory business rather than the fund. They did bring on a VP ~3 years ago with relevant PE experience who is solely dedicated to the PE side and he is the one that has been really trying to push to raise a bigger fund so I’m thinking that he will be catalyst.
This regional firm would be my one shot of breaking into PE with my current experience. The end goal is to absolutely gain deal experience and if they end up raising a bigger fund stick it out, but if not, try and find another LMM shop or a better firm that has a dedicated LMM fund (I could care less about name brands). I know this getting ahead of myself, but the cash comp has been a worrying factor. I am pretty comfortable with my contact at the firm and he’s pretty laid back, do you think it’d be tacky to ask for a rough estimate of what he thinks the position would be able to attain in terms of comp?
Again, really appreciate your input and would love to be able to come to you with questions regarding this situation in the future as I believe they are looking to hire in a couple months.
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