Is LMM actually the move?
Hey all,
[Would especially appreciate the help of some of the more seasoned WSO PE guys!]
I’m a first year associate at a MF, in one of our growth/minority investment funds (my group has about $30B AUM) in NYC. I worked really hard to get here, but I’m 6 months in and realizing 1) my chance of promotion to VP isn’t very high given associate headcount and recent VP hires, 2) the lifestyle sucks all the way through partner level and people don’t see their families much. I’ve started exploring other options and had a networking call with a LMM/MM firm about a month ago. I’ve been thinking a decent bit about that shop/similar ones vs my current situation, and I wanted to float my thinking on this forum to see what insight others may have.
Details on the smaller firm: ~$2B AUM, most recent fund is $600-900M and was oversubscribed, located in a Southeast LCOL city (compared to NYC/SF/Chicago). Very successful returns in first four funds, and no issues fundraising. Partners want people to stay, and the first generation of associates (firm founded a decade ago) that have decided to stay are now principals and on partner track. Good headcount per $AUM. WLB: 45-70 hours per week on average across all stages of deals (upper end for live, lower end for not live).
Obviously WLB is significantly better at the smaller firm, but the more I think about it, it seems to be that risk adjusted total compensation is likely better as well? My chances of making it to partner are significantly higher (I would judge as high as 10 to 1 vs the MF), and assuming the firm continues to raise $800-$1.5B funds every four years and have good returns (which seems sustainable through economic cycles given very niche firm sector/strategy), there is a lot of carry to go around for the relative headcount. Not to mention, my chance of burnout from the hours is extremely low, and when I networked with the folks there, I got along very well with the team and could really see myself enjoying the culture.
Cash comp is obviously lower than MF (but closer than I thought), but the COL is way lower than NYC, so when I run the math it seems like I’d be saving approximately the same on my base/bonus from associate through principal. Coinvest offered to associates.
Am I missing something here? Should I just jump to this other firm and get some of my life back, plus a MUCH higher chance of legitimately being on a partner track? I know the partners there make a killing. Do people not jump to firms like these more often because of the location and the “lack of prestige?” I personally couldn’t care less about either of those things.
Bump
Unfortunately I don’t have anything helpful to add, but curious about associate salary at a place like this if you’re willing to share
$220-250k total, good sir
Appreciate it
You're raising a good point. However, I suspect you may be slightly late to the party with this fund and shouldn’t count on your career trajectory unfolding quite as smoothly as you hope. The first generation of associates took a gamble and it paid off; now that the firm is well-established in the mid-market space, they can more easily attract mid-level UMM/MF talent.
Additionally, your assumption that the fund will seamlessly expand and raise capital every four years is far from guaranteed. Although I agree that focusing on LMM/MM funds can be a good move, you won’t be alone in pursuing this strategy. Expect more competition, particularly from individuals lateraling from other shops, which could limit your opportunities.
Thank you! This is the kind of commentary I was hoping for. You make a really good point about the firm being more mature than I think I was envisioning. Do you think the fact that it’s in a less desirable location creates a bit of a moat from the broader talent pool?
I'd assume the more esoteric the location is, it would create a bit of moat.
For example if the firm was based in Kansas City (no offense to the city what so ever) the firm would be pretty hard pressed to find high quality candidates. However, a place like Fort Lauderdale (not viewed as 'Tier 1/2' city) would still be pretty competitive
Strongly echoing this.
The "successful" early employees of a fund is a marketing tool you hear from every solid, newish (founded in the last 10 years).
Don't base your own happiness, career and life on their success how much they like the fund.
Plenty of other factors to consider!
Is this just a generic LMM fund or do they have a specific sector focus / niche ?
Very specific sector/strategy. Only fund I know of that does what they do.
Jesus this kid is already drinking the kool-aid
Interested
What about future exit ops, can you ever get back to a MF, or does even two years at a MF keep many LMM doors open in the future, at possibly higher salaries and levels.
"Is XYZ Actually The Move?" should be a copypasta. Like "XYZ is Paradise"
The big question here is (besides the usual obvious ones: do you like the people at the new firm, strategy, industry sector, new city, etc.) - are you philosophically okay booking a one way ticket there?
By that i mean - in taking this job, while by no means are you stuck working at this specific fund in that specific city, it is unlikely that you will be able to return to a MF NYC seat. To go MF NYC (non-flagship strategy) -> LMM 2nd/3rd tier city -> MF tier 1 city is almost unheard of. If you are unhappy at the new role, you're probably somewhat limited to either another LMM role in a major city or a MM/UMM in a non-core city - which you may be totally fine with, it is just a truth you will need to be comfortable with that with this specific lateral, you may be slightly limiting the aperture of your next move.
Doubt the returns are going to continue moving forward. Lot of the returns were due to multiple expansion (ex. buy something at 4x ebitda for 4 million and roll it up and sell it for 10x when 20 mllion in ebitda). Those 4 million in ebitda companies are trading for 8-9x now.
Then returns up market should be even worse, no?
The LMM deal space will almost always make sense as far as making money goes. There are tens of thousands of small businesses that can be rolled up and thus de-risked and then sold to the next PE buyer.
The challenge is, that strategy doesn't scale well as you move up to bigger businesses, bigger funds, and more PE competition.
The model goes like this, a firm raises a small amount of money either in a fund structure or as an independent sponsor. This can be anywhere between $5-10M up to $100M or so. This firm is buying small, single digit EBITDA businesses for 4-8x EBITDA in all the usual PE spaces, professional services, home services, etc.
It's a hassle to buy 10 $2M EBITDA HVAC businesses vs 1 20M EBITDA HVAC businesses and that is what all these funds are betting on. So the team runs really lean, handful of juniors and partners, does this LMM PE, and has a couple of decent exits. They modernize the businesses, but can sell a platform of small HVAC businesses for 10x EBITDA, when it might have been buying for 6x (HVAC is probably higher than this now, but numbers are just illustrative). The combo of multiple expansion and ideally a little more business growth due to professionalization makes for a good return.
Now what happens is the firm pitches its success to LPs, talks about how it has a proprietary xyz method of doing deals, growing companies, and can point to a 5x MOIC. They are able to raise a... $500M fund or something incrementally larger. Well now the fund needs to commit to ~10 $50M checks, which means average $100M EV deals (again illustrative numbers) so now we're talking about bigger checks and bigger deals.
The problem is, with a $500M fund, it's too tough to go back and buy dozens of $2M EBITDA businesses, that's too much work, would required too much staffing, especially given the mgmt fees of the fund, so the firm decides it needs to start paying up for bigger and better assets. So all of the sudden, it's now competing against the established funds it once sold to. Everything becomes an auction process and it just becomes a price war and a who needs to allocate capital the most type of process.
So given the timing of the fund, you're unfortunately a little late, unless the fund really has legs to get to the next level. I would really diligence the niche that they're in, the value creation strategy, and make sure it has the ability to scale. Either that, or make sure the fund is ok being a perpetual sub $1B fund, which would be great for lifestyle and $ for the existing partners, but not a good place for long-term growth.
As far as location, cost of living, etc go. That's a personal choice depending on where you want to be. I was close to taking a MM gig in a squarely Tier 2 city post B-School. Would have made below market PE money, but at a VP level, I would have been a king in this city. The problem was, I was single, late 20s, and would have been isoalted from my friend and peer group. It wasn't the right time for me to make the switch. I ended up in NYC and I love it. Yes, it's a ripoff and I get way less for my $, but I'm personally happier than I would be if I had a house and a range rover in a random suburb somewhere. Depends on what you want out of life, where friends/family are, etc.
I work at a LMM fund in a LCOL city. A couple things from my experience, which may or may not be true for the fund you’re looking at:
I may sound very negative on LMM, which is because I am, but I do believe that you could find a nice set up where you get decent cash comp, room to grow, etc. I would just caution that you think through all of those aspects before you make the move
Why would a perpetually $1B fund not be a good place to be long-term? If existing partners retire, wouldn’t that create room to move up? The firm just has to keep its hiring under control, right?
boomers never retire man, look at average age of politicians and c suite
late to this here but point stands for every PE fund, especially the large caps. why would senior partners give up 100s of bps of carry in multiple multibillion fund vintages when they can just doze off through IC meetings and outsource all their work to smarter, hungrier junior partners and VPs that have maybe a combined 50bps of carry? They wouldn’t, so they stay forever and everyone below them gets compressed.
There have been good comments throughout on the LMM side of things and the pros and cons from a career perspective.
I think a lot of this honestly should come down to the location though. I know that sounds very surface level but if you don’t have a tie to the city and don’t think you want to build a life there then it honestly just needs to be a pass. If it is somewhere that you legitimately like and think you could see yourself then my advice would be to just take a week vacation and go stay in that town for a week and don’t make a final decision until after.
You have tons of optionality now with your current path so don’t jump off that path unless the stars actually align.
Great advice, thank you!
Agree with Harvey Spector's comment above on the grittiness of LMM roll-up deals. This has continued to work from a returns perspective for logical reason and will likely continue to do so, but its a grind.
Also, you will be handling non-deal-related workstreams which you currently aren't. Your MF has internal teams for portfolio valuations, quarterly deal-by-deal shareholder reports, investor relations management, etc. which will become your responsibility.
Also, how do you know typical WLB and hours/week if you aren't working there yet?
Good point on all the ancillary work I’ll have to do. Realizing more and more that could be the majority of actual hours worked in a day. Have to consider if I’m ok with that. As for WLB, I spoke to former and current associates. This is one of the main things I’m solving for, so I’ve asked very bluntly about it to the formers and I feel confident I’ve arrived at the answer for that piece specifically
What is the fund size where this ancillary work is not done by the core investing team? Eg $1B funds ?$5B? Etc
Many of the commenters bring up valid points. I'll add my 2c to look at it a little differently.
I wouldn't be so hung up on calculating your odds of becoming a partner specifically at this fund or whether it's "too late", etc. As long as you're happy with cash + carry and feel that you're being valued fairly for the risk you're taking and what you bring to the table.
I'd focus more on whether you believe this strategy is solid and will have a durable advantage. You say this is a one of a kind strategy... I'd really critically examine this statement as if you're doing diligence on a deal. Dig deep and call around to make sure this is the case. And is it a "trade" or a real long-term strategy that can work for many years? Then, I'd look at the partners you'd be working for and try your best to determine if they will actually give you a seat at the table, mentor and teach you, be good guys and sponsor your career long-term (sans "guarantee you a partnership" thing). Then, I'd think about whether you can see yourself longer term in that city or at least the region (e.g., Southeast).
If you think you're actually going to build a shadow track record executing this strategy, have a real hand in driving deal success (soup to nuts, sourcing to operational to exit), you can always consider striking out on your own if you get stuck at some point. Or you will be an attractive senior hire at a different fund with more upside who will want your experience and network. This is America - you can't reasonably expect to ultimately "make it" by praying that the actual owners will deem you worthy of partnership. Own your own thing. Remember, by the time you find out, 3, 5, 7 years later, you won't be debating "should I go back to MF in NYC". You'll be growing a family and will need to really think long and hard about securing your place in the world. Trying to find the easiest place to get promoted is a false idol. Just make sure you're building equity in your own skill set, experience, and network in the time you work at this place, then career becomes much more non-linear but the cream rises to the top.
For completeness of thought, you might ask, "well if I'm not going for partner, I might as well stay at MF and clip a nice coupon". This is a valid career strategy. However, I'd argue that your optionality actually starts to NARROW as you hit vp/principal making $500-700K cash comp with some carry that's worth a lot on paper in 10 years. At that point you have a lifestyle and a family that is used to it. Harder and harder to take a pay cut to escape the dead end. Your skillset will be such that it is highly optimized for large firms with all kinds of brand and infrastructure support. I.e., you're good at politicking, managing large-scale coordination, and managing internal stakeholders, but you haven't developed the muscles to go out and actually do deals at human scale with sleeves rolled up. By the sound of it, you're going for a real seat at the table one way or another. There comes a point in your early/mid 30s where your career needs to "grow up". It's no longer about getting the next promo and keeping options open, but having a real strategy for how you're going to secure a valuable place in the world. I'd argue that learning a niche skill that you can be entrepreneurial with and getting to the shot caller seat is worth the apparent give-up of "brand name" optionality (which is an illusion). The market for a "stuck" mid-level guy at a big name will be surprisingly smaller than the market for a killer at a no-name firm once you're over 35. Not saying anything about this specific opp you've got to make a decision on, but being on the lookout for these and swinging at the right pitch is key to unshackling yourself from these anxieties of corporate dronery.
Very glad to have come across this comment, reshaped my perspectives, thank you good sir.
probably the best advice on WSO
Any updates you can provide?
The main issue I've seen is these LMM funds are run essentially as fiefdoms. The founding partner dictates everything. They typically don't have enough employees who have worked there to give you a good estimation of the culture and your experience may vary.
Have seen friends make the move and gotten burned in various ways. Few things that I've seen happen:
My theory is finance generally attracts more sociopathic personalities. Without some institutional constraints / power sharing - you get a higher chance of totally bullshit outcomes. Say what you will about a MF/UMM fund, but at least you can approximate what you're getting into and what it takes to success.
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