New / small funds doing larger deals...
Quick question folks. I am currently amidst recruiting for PE and have been involved in a handful of processes for shops that are a lot smaller than I am looking for, but who are doing deals seemingly well above their weight class. If you were to join a mid-market shop with a $500m fund (not AUM, actual fund size), what size deals would you expect these guys to be doing? I have been interviewing at a few shops with fund sizes <$500m that say they look for platform acquisitions with $50m in EBITDA which doesn't seem to add up here... Is this just because they are new funds so they are trying to do a quick first fund with only a handful of investments before raising a larger one?
Yes. You could invest in 10 companies that cost $50 each, or you could invest in 4 companies that cost $125 each. If you invest in four companies that cost $125 each, and they go well, you can go back to your LPs and say "We did a good job, but we need to be able to do more than 4 investments". It's a watered down framework but the point stands.
I would be surprised if a shop is going to write checks that comprise >25% of the committed capital just given concentration issues. Over the past few years, there has been significantly increased interest from LPs in co-invest given the increased amount of dry powder they've accumulated, plus allows them to avoid GP fees on that money. IMO it's the easiest way for small funds to do bigger deals.
they're likely getting co-investments from their LPs or others on top of the fund's allocation
This. They'd never commit a seriously material % of their committed capital towards a certain trxn without extended commitments from key LPs
Based on this, would you guys think that they'd look to fundraise in short order with a larger target or would it still be the typical ~5 years with the first fund?
I worked at a first-time fund and yes, in general a Fund I will be more concentrated than subsequent funds. There's a few reasons, including:
All of the above is pretty spot on. Only thing I'd add is that the first-time funds you see doing really big deals are often run by former megafund guys who are comfortable with larger deals. The idea is that you can use coinvest to do larger deals and justify much larger fund sizes down the line without having to raise a bunch of money in a committed fund upfront.
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