Joining a smaller fund at a bigger PE firm
I am a 2Y MBA student recruiting for PE roles. I have been in conversations with a firm that has both a main/flagship fund dedicated to large cap buyout and funds dedicated to other strategies (e.g., credit, middle market buyout, special sits), and am evaluating joining the MM fund. It's a great opportunity with a storied firm in the industry, but I have a few concerns as I continue in their process, mostly related to career progression and economics. I'd love to get any relevant perspectives on the below questions:
- How does carry work? Does a typical offer for an investment professional in the MM fund receive carry in only the MM fund, or is there also exposure to the main/credit funds and vice-versa?
- Related to #1, how much of the MM fund's carry pool is distributed among the investment professionals dedicated to that fund? One of the attractive things about this opportunity is the $ per MM-dedicated investment professional, but that figure could be artificially inflated if half the team's carry pool is swept to the GPs. I imagine senior back office people (e.g., controller, GC) receive some mix of carry.
- How does the GP typically think about scaling the MM fund? How do they determine how to size each strategy over time? At this stage I'm looking to build a career at my next firm and understand that paths open up as funds grow.
- How do firms decide what fund a deal goes to when the equity check size could be suitable for either the main or MM fund? A partner who interviewed me said that situation hasn't happened yet but didn't provide a very clear answer, and I didn't want to push it.
Appreciate anyone's help. It might be premature to be thinking about these questions without a firm offer in hand, but I have peers who have received exploding offers (from other firms) and it doesn't hurt to be prepared.
You are not off-base thinking that focused funds within a larger firm can offer outsized opportunity. However, it's not guaranteed, and the biggest determining factor is the recency of the strategy launch. It's unclear from your post whether this specific opportunity falls in that bucket.
True to form for the industry, there is no one-size-fits all answer here. One firm may offer commingled carry, others may offer siloed carry. It is definitely more common for carry to be specific to a vehicle. As an example, if you join this one and they're one year into the investment period for Fund III and four years into the five-year period for Fund II, you may get a minimal allocation in the older fund, a market allocation in the current fund, and nothing in funds for the other strategies.
This one is even less hard-and-fast. There is wildly varying ethos among firm founders about carry allocation. Look at Golden Gate, for instance. There is tremendous senior turnover, with numerous departures and spin-outs, because people don't like being at the top of the pyramid without earning commensurately. Then you've got a place like Benchmark (I understand that's venture, but it's a well-known example) that's very public about the partnership being true to the word, where each fund is divided equitably among the partners.
The common phenomenon is that while a good chunk of the carry pool goes to the GP, or perhaps the individual founders of the firm, depending on the idiosyncrasies of that specific shop (which makes sense, given that it's their house and their LP relationships), there's a lot of room left to reward the people who are hired in to actually run the strategy.
You'll laugh at how straightforward this is. Market reception. Fundraising appetite is almost always limited only by what they can get away with. If performance is good and/or the fundraising environment is favorable, these things can scale favorably. Look at what Thoma Bravo, Vista, and Hg have done with their middle market vehicles.
I don't have direct experience with this. A similar answer probably applies; different places will handle it differently. The more intelligent approach is to delineate the investment parameters adequately enough that this doesn't happen (e.g. $25-75m checks out of the smaller fund, $100m+ out of the larger).
You absolutely should ask about this as part of your decision-making process. It's not stupid on your part to avoid being pushy. Save it for your post-offer conversation.
Good luck.
Thanks very much for your reply, APAE. Very illuminating insights from one of the all-time legends on this site.
To respond to the beginning of your comment -- this firm raised a dedicated middle market Fund I last year, so the strategy is quite nascent. A big part of the appeal here is the chance to join near the ground floor and do something a bit entrepreneurial while enjoying the brand name, resources, and track record of the broader firm. They've made a couple of investments out of the MM fund, but the team is still lean and the firm is building it out.
One concern I have regarding the cap on check size is that as the fund scales, it necessarily will need to do a greater quantity of deals, as it can't do larger deals to deploy capital. Two potential adverse implications are (i) corresponding expansion of the roster to get more deals done, which would dilute existing investment professionals; and (ii) slower fundraising cycles and pace of deployment due to the constraints posed by scarcity of quality assets in the fund's target investment areas and sizes. Curious if you have any thoughts here.
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