Just had a case interview with a large private equity fund of funds. Was wondering what the community here thinks the key criteria in evaluating an investment in a PE fund are. I said
History - how long has this team worked together, performance through the downturn, past experience of team, how previous investments have done, any kind of industry relationships managers might have
Strategy - what kind of companies they target, what markets are the companies in
Performance - have they outperformed markets, risk (sharpe ratios? or is that just for hedge funds)
Other Investors - a cornerstone investor in the fund? are the managers committing their own capital?
What do you guys think?
Good start. For performance, the benchmarks we use are usually preqin or thomsonone (previously venture economics) to compare fund rankings for a given vintage year. For risk, sharpe ratio isn't relevant... we use Loss Ratio (total portco losses divided by total invested).
Look at the structure of the fund, too. Management fee, carry, Key Man clause, Preferred return %. Also, team economics is very important. Is the fund's founder taking 70% of the carry, or does his spread it around the team.
For strategy, think about how their strategy fits into today's environment... For example, distressed debt funds could make a killing in 2008/09 since everything was being priced like the sky was falling. However now, a lot of the large cap debt pricing has recovered so funds that generated 70-100% IRR in 2008 are stretching to find debt yielding 15%.
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