Joining a new fund?

Hey Everyone, found this forum very useful over the years and looking for advice on first time funds. wanted to reach out to the forum and see if there are questions I should ask / considerations to think about before accepting.

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Definitely not an easy choice as it has its upsides but also higher risks involved - few thoughts below:

Upsides:

  • Smaller teams
  • Usually higher responsibility
  • Promotions: if the fund is performing well, easier to get promoted through the ranks as the firm is growing
  • Carry: usually handed out easier than in large firms and given small number of employees initially, chance to get a larger piece of the pie than you could get in 15 years in a MF; obviously it's a smaller cake at the beginning

Question Marks / Due Diligence Areas:

  • Work-life balance / culture: totally depends on the individuals working in the fund
  • Compensation: sometimes paying more than MFs to attract talent; sometimes paying substantially below UMM / MFs
  • Learning opportunity: cannot learn how the firm is investing but only how the founders are investing

Key Risk Factors:

  • Long-term outlook / fund performance: usually the second fund is the most difficult to raise as the first investments are not yet realized and investors tend to be in a "wait and see" mode; obviously, there is also no track record that you can base your decision on as most of the guys that raise first-time funds look decent on paper
    Interesting Case Study of how it can go is Novalpina which got liquidated after the LPs voted to oust the GP
  • Fewer internal resources: IT, subscriptions, IR, operating partners, accounting, etc.
  • Exit ops: tend to be worse than classical MFs
 

As a caveat to the 'higher-responsibility' and 'smaller teams' upside bullet, this should also be a downside as this translates to worse hours as well in most situations. Since there are fewer resources to go around and the processes are new / teams don't have years of chemistry together, I've generally seen people have to work longer hours during the start-up years. 

 

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