I’m in my mid-30’s and probably (definitely) much older than the average poster here, but would love to hear all points of view that anyone’s willing to share.
I’ve been in investment banking for about 10 years. Currently a director. If I stay on my current path, I expect MD promote in maybe three years. I’m sure you’re all aware of the demands and risks that would come with that. I currently have no clients of my own.
Recently, a new opportunity fell into my lap. I’ve been offered the role of CEO/managing partner of a new PE fund. It would have $50-100M of initial funding from an institutional investor. I am good friends with the CEO/founder. Annual cash compensation to me over the first three years would be seven digits, which is significantly greater than what I’m currently making in banking (which is slightly above market). There would also be significant upside in equity/carry. We would be targeting much smaller companies than I am used to working with (~$10 - 20M EV vs. $500M - $5B EV). The goal would be to demonstrate a good track record over the next 5 - 6 years, attract other institutional investors, scale up our investments, and ultimately reach $500M - 1B in fund size.
I have zero private equity experience. The first 6 - 12 months I’d likely be working on my own to get things set up with lawyers, accountants, etc. Then I’d add an associate, an admin, etc.
Good idea? Terrible idea? What are the considerations I should be thinking of?
$10M - $20M EV is a pretty small company. I would go for bigger companies given your skill set. You're not an operator, therefore you require more layers of management in a company to be useful. Layers come with larger companies.
Personally, I would do it, but be ready to jump in and do whatever it takes to make a deal work if it does start going south... You can't fuck up and torch your track record like you said...
Pretty impressive $50M/$100M is already lined up. The hard part is basically done. Even if you fuck up, that's much more impressive than what you're doing now and you'd fail upwards.
Just know that it will likely take 10 years to go from a $100mm fund to a $500mm+ fund. The PE fund cycle is long and new funds are slow to raise. Could mean bringing on a second managing partner. That being said, owning 70%+ of the carry pool on a $500mm fund means that you will have a clear path to 8 figures.
A first year principal who is entrepreneurial and wants the upside would kill for $50-100mm first fund. A tenured partner who wants to slow down would not.
If you are entrepreneurial and want to think about investing / business ops in a more tangible way, it’s a no brainer, in my opinion.
OP - this seems like this is your friend trying to convince you to join
I'm younger than you, but have experience working with LMM businesses. @m_1" brings up a great point which is, you'll have to put some thought into how you want to manage the businesses. Smaller businesses, especially legacy ones, are usually small for a reason. That can either mean there's a lot of latent opportunity or it's just a tough market and a bad business. Either way, if I were you I'd spend a lot of time thinking about what type of businesses you plan on buying, how you think about management, and what your value add is going to be. LMM PE is less of a pure capital structuring exercise, so if you're trying to get a $5M manufacturing business to $10M, you're going to want to have a sense of what you're going to be able to execute on and what your investment mandate is going to be.
Outside of that, I'd 100% go for it you have someone that wants to give you money to invest and is going to pay you handomsely to manage it. Most experienced guys/gals in PE would kill for that. Worst case, you fail upward, make more money for a few years and then head back to banking with a better perspective on the PE world.
Yes. Very few people on this site seem to realize it but you make much more money being an owner.
This has already been answered correctly, but the predominant answer is yes. Maybe there's a small exception of MF Principals who have a ton of autonomy, love doing large cap deals, and already bring in $2M+ a year, but the majority of people, even at $1B+ funds in VP+ level positions would love to have a stable $1M+ salary each year, committed capital that gives them flexibility to do a number of deals, and the upside to do well and potentially raise a larger fund where you're the GP.
Most VPs/Principals get stuck in the upper/mid tiers forever, making a good salary, but not a great one as the Partners take the lion's share of carry. They either look for a small fund to join as a Partner, or have to strike out on their own, taking little to no salary, fighting to raise money, all taking the chance that they can make their own fund happen.
So long/short, it's a pretty unique opportunity.
Oof, not a good data point, but i'll do my best to give you some useful thoughts on the situation.
That level of comp from a fund that is so small for someone with zero PE experience is pretty absurd. $100MM, while no easy task for a first time fundraiser, is still not big enough to be paying that out to a single person in guaranteed cash comp. You're not going to see exits for years, so you'll have to live off your management fees in the interim.
Other people have raised the point, but moving from such large deals to some of the smallest is going to be a rough adjustment for you. It was difficult to me and I had at least sniffed the range of some of the smaller companies I now invest in.
Ultimately, with PE you're going to have to win deals and source, especially in the LMM where valuable people definitely have to be a jack of all trades. You're not winning a strategic alternatives mandate from a client, but you are finding a target investment, figuring out if you like it, convincing them to like you and take your money, all while simultaneously executing as you currently do. Very large firms, Platinum Equity, as example have separate deal sourcing, execution, diligence, etc. But at the LMM you better be good at most tasks, not just directing traffic between service providers.
Track record is everything. If you fail, you will likely be out, unless you come from the right family, etc.
All that being said, what do you have to lose? You could go, fail, learn a lot, and I'm sure the investment banking world would gladly take you back. Guaranteed cash comp at that level for a new fund? If that is real, then yes, take it. Knowing what I know, I don't see how you can lose taking the chance and seeing where it goes.
Being a banker for $500M - $5B deals has as much to do with investing in $10-20M EV companies as commanding a battleship has to do with driving a jetski.
The lower middle market is an unsophisticated mess. Management "teams" don't exist, there is usually an owner/manager who runs a business whatever way he's learned to do it. Most functions you would think are critical to running a business - strategy, finance, sales, information systems, budgeting, forecasting - are frighteningly absent. CEOs turn out to be plant managers, CFOs turn out to be bookkeepers, and you'll find yourself looking around for the adult in the room.
You're handcuffed from performing real diligence. There won't be a data room, and the numbers you get from the company will often be accompanied by a shrug and a comment of "well we don't track that" or "you shouldn't need to see that." Your QoE might come back with a note that says "we have no idea if any of this is actually true." Any knowledge of "the industry" is hard-won and closely guarded by the few who occupy that particular niche, so hiring a consultant to run a buy-side DD won't do anything other than run up transaction costs.
Every deal you think you have locked up will go away, twice. Sellers are random-number-generators with egos and very, very odd expectations for how a transaction process should go. They have advisors whispering in their ears -- family, wealth managers, lawyers with "business experience" which means they've written up formation docs once or twice -- who are sources of absolutely baffling advice that you'll have to work through. And then the deal will die again, right before it comes back for no apparent reason.
...and that's all before the transaction even closes.
I'm not giving an opinion on whether or not this is something you should do - it sounds like there are a lot of reasons why this could be interesting and potentially very lucrative. But the way to look at it is as if you were an entrepreneur, starting a company doing something for which you have only very general experience.
Yes, bang on. I remember the first time we brought someone on who had PE experience at a $1B+ fund. None of what he said would make sense. He severely overestimated the amount of leverage we could get on deals, wanted to hire consultants, etc... It was good because I learned a lot about how 'real' PE firms operate but if I had done things his way...we would have racked up $700k in DD costs on a $7M deal which makes 0 sense.
This x1,000. Plus, usually business owners of companies this size have massive egos and are sociopathic.
Very good post, I went from working at a bulge bracket in investment banking to lower middle market private equity and it was a complete change from what i was used to.
As noted above, most owner operators run a very lean unsophisticated team which has a significant impact on diligence and ownership post close. If you want to be very successful and add value I would plan on your firm playing a very heavy role in operations across all functions within the organization post-close. Some major areas you will need to address in diligence and post-close include: i) work with the owner to build out a strategic plan during diligence and refine/execute on it post close (understanding how you will grow the business, the market opportunity, the potential returns, and the risks is very important); ii) build out a management team and other functions in the organization which will be complicated and drive down EBITDA early in the hold but will be needed to take the business to the next level; iii) develop a growth strategy, build out a sales strategy/process/team; iv) professionalize / standardize / improve operations whether it be service delivery, manufacturing, supply chain, etc.; v) build out effective financial reporting and KPIs to monitor business performance.
I would definitely bring on a partner that has operating experience given your background as they will bring much needed experience and owner operators will be more willing to take guidance from someone that has sat on their side of the table. I disagree with your strategy to add more companies to diversify the portfolio. I think you will have a lot more success really digging in to find the best investment opportunities and getting more involved from an operational standpoint. Owning and adding value to a large diverse portfolio of businesses is simply not scalable for a firm of your size. If you are concerned about risk try to find more defensible less cyclical businesses. Some things to think about: i) find an owner and team you think would be a good partner and get them to roll significant equity to make sure they are bought in; ii) build out a good strategic plan you are confident your firm can execute on; and iii) spend a lot of time in diligence digging in to confirm the strategic plan will work, numbers, market opportunity, market position / competitive landscape, customers/suppliers (call all major customers/suppliers), read and understand all the customer contracts, understand all the industry regulations and make sure the company is compliant, and make sure you understand all the risks because these deals are messy and there are always red flags somewhere (you need to get comfortable with the risk and if its an operational issue have a plan to fix it post-close). iv: get a lot of protection in the reps and warranties because these deals are messy and sellers are often less sophisticated so you can get good terms; v) find lower cost lawyers, accounting firms, and other consultants because using top firms will not be economical for these smaller deals.
Assuming this isn't a troll post.
A) PE is late in the cycle. Existing shops don't know how to deploy the $2T in dry powder they have. Firms have been moving downstream aggressively. The Jimmy John's by my office was literally bought by a Boston PE firm. No BS. There's more competition for even low quality businesses and valuations are pretty high and trending higher. Could your firm handle a slow-down? Other PE firms have a track record to fall back on, so there's more at stake for a start-up shop. Many targets may have received offers previously. Others will shop your offer around. If you find something, always question what the catch is? If it's too good to be true, it probably is. Even the big PE players occasionally get burned (but probably because of overly optimistic projections and/or too much leverage.)
B) Capital markets are pretty robust, but will a bank be eager to give your start-up debt financing?
C) You better have a ton of patience. A lot business owners don't have shit documented, it's all in their "head". They won't know the fancy IB terminology you know. Last thing you want is to intimidate or frustrate a potential seller.
D) Many business owners have ego. Maybe understandably so if they built a ten figure business from $0. But because of that they often have a chip on their shoulders. Or they think their businesses is worth way, WAY more than it really is. Some sellers have outrageous demands (e.g. you can't do this, change that). Fuck you, I'm buying the business. How are you going to add "value" if you can't lay off redundant employees or can't do business with "immoral" customers?
E) Some owners hate PE or think they should. You may have $$$ to offer, but you may still get the door shut in your face. “Search funds” will probably be a thorn in your ass. They claim to be “anti-PE” and are willing to bend over to close a deal.
F) Be ready to get your hands dirty in LMM. It won't be pushing papers and wearing shiny cufflinks like in IB.
My advice is to see if you can wait a bit, especially since you don’t have any PE experience. Will give you some time to lay the ground work (i.e. do research, make contacts/network, find potential targets, etc.) Once the music stops, you’ll find more targets, willing and reasonable sellers, lower valuations, and better upside (since you would be buying “the dip”).
If you can handle these truths, you may end up making a ton of greenbacks. Good luck either way bud.
Congrats, sounds cool. Good comments on strategy, etc. though I think those are some what less applicable to what you should be considering. Those details can be hashed out later - you need to be thinking about are you capable of doing the job and what is the risk profile (aside from returns) of your position as you learn the ropes.
The only concern I'd have is that you'd be setting yourself up for failure - #1 item on my list would be getting a contract with guaranteed comp (is that what you have or a loose agreement?) Last think you want is for things to not go as planned operationally and then have the guy realize you aren't right for the role and cut you loose. Being a banker vs. an investment professional is huge difference, though rooted in similarities. You're compounding that by not just joining the buy side but leading your own fund. You're are so green you don't know what you don't know. There are so many intricacies of running a fund/investing that need reps - similar to banking, its about the deal reps. Frankly, to me its insane that this guy would even hire you, but that's on him not you. Many people first going to the buy side are gonna be gun shy about about closing and it takes some times getting used to investing without perfect information - its one thing to have a nice write up its another thing to write the check.
If you haven't already, I'd just get the guy on board with honest conversations about what you can do and what you can't and that there will be a learning curve involved. Assuming there is no guarantee, this isn't a scenario where I'd want to over promise because things could get ugly.
At the end of the day, I doubt even if this blew up your career would be ruined as you've proven to be successful. Its more so trying to mitigate a potentially downside scenarios.
You would be crazy not to take it and quite frankly he is crazy to hire you (no disrespect). If you are in the sub 50m EV space I would focus on four things of which three are quite interrelated:
Get a good operator into your business / maybe even structure a deal with 3-4 people you know / from your network. There often are people in between jobs or retiring etc. who would fill this in executive capacity and other people can do that via board roles. If you have an operator in your team / bench, you limit downside extremely because you have never run a business and probably wouldnt be able to (no offense - same is true for me and most others). The operator is downside limiting and also the biggest catalyst you have in "changing" the business. Small businesses can actually fall apart because of people / fuck ups so you need someone somewhere who could go in and make sure it wont be a zero. It could even be someone who does this part time i.e. spends X days with the Company in a executive chairman position or whatnot. They should be able to make quite a bit of money (more than what you think is fair) on the premise they put in some money too. You are a senior project manager as BB banker so I would play that skillset to your advantage.
Identify vectors for value creation. Given you cant hammer leveregage on deals - knowing exactly what you can do to the business will help. I did sub 50m tech deals until recently and for me it was always the same: Take a product from local to international, productise toolsets / consulting knowledge, move/ supplement direct with indirect or vice versa, improve GTM efficiency, focus on strategic product positioning / partnerships with a clear view on who would buy this (strategics or further "growth" story for PE) and implement proper strategic planning (starting with the basic software products etc.). Ideally have a "person" for each workstream (could even be a consultant you really like who jumps in for a couple weeks etc.). I dont necessarily mean hiring people for each, but have someone you can call. Ideally, develop a 2-3 people team that can jump on boards with you but also is the same team you can call on in DD for example. Be generous to these people (in general, give more to other people than you think is fair in the beginning - structure it so they only make real money when you do). This could be in addition or replacing point I if the CEO and team is so good you dont want your own guy circling over them.
High conviction sourcing approach. Stay with assets you are really comfortable with in the beginning. Dont buy crap. If you cant get cheap quality buy okish priced quality. Small businesses that are cheap are definetely that for a reason and you dont have a base line leverage return running for you. This could be based your past BB experience or the operators (see point 1) bringing assets in. With the latter i have had very good exp. You would be surprised how many people know people who would do XY. Structure the deal favourable for everybody i.e. upside share over X but low upfront payment etc. Will be case by case dependant but there often are ways to structure deals so the person rolling over shows how comfortable the people selling really are. I would rather work on a good deal which might look expensive to outsiders for a longer time than start bidding on low quality companies for which you have no plan or network.
Think about bolt-on / tie ins whereever possible. Its a great way to scale into something that is working well vs. new acquisition risk. One of the biggest drivers of exit in this size bracket is size of asset so its a great way to not only deploy more money in a risk-averse way but you actually improve odds of a quicker exit.
One quick edit: As M1 said above: don't think about this as PE but much more as you finding guys to buy a business with and from. The "institutional" part comes at some point. Find people you trust who DD the asset with you. Focus on the key elements only because speed will increase your odds of buying the asset (long DD exc. kills so many small deals...) and quite frankly in the small cap space, you really don't need that much more. Get an accounting firm to do the basic number stuff and a cheaper law firm to do red flag checks. For the rest you need 2-3 guys, not consulting firms. Don't spend too much on good logo consulting firms. If you need someone to ask the right questions for you, you shouldn't buy the assets. No one who is not putting in some money (or is in any way part of the distribution when the deal goes well) should be able to convince you to buy an asset.
Great comments on this thread so far.. PE, even in lower MM, is super competitive, so the first question I would have for you is, "what is your angle"? What special sauce will your fund bring to source and win deals, have conviction to close and identify value drivers, and ultimately generate returns? Sector specialization? Operational capabilities? Help with recruiting (some growth equity funds do this)? Turnarounds? Debt/mezz specialist?
I work at a boutique MM IB focused on consumer products, and I get inundated with spam from PE shops, search funds, etc. The worst offenders are ones who say some variation of "we have a $X00 million fund, looking to invest in companies with over $X million of EBITDA in industries A, B, C, D..." which just begs the question, how are you different from hundreds of other PE investors out there?
You have to have some competitive advantage or differentiator, or else you will be lost in the wilds. This matters for sellers and sell-side M&A advisors. For sellers, they want to know (a) are you serious and will you have conviction to close a deal?, (b) will you bring anything to the table besides capital (this is important where sellers rollover part of their equity in hopes of a second "bite at the apple" down the road). For advisors like me, the same questions and also (c) will you waste my time?
Anyway, this is my first post on WSO.. very interesting conversations!