I'm not setting shop I'm Still a student actually but I've always wondered for the people that go all in and attempting to set up their own PE or REPE fund and all fundraising and initial setup fees, how do you guys survive ? Savings? Living off partners comp? Etc. I mean you still have to pay bills, kids, do you live frugally? Etc
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That’s correct, mostly.
Going off your posting history, how would you know? Not trying to be malicious or mean here, so please forgive my blunt phrasing but you said yourself you're literally someone that dropped out of school, then lost his parent's money trading. When have you started an HF or PE fund?
Every partner I know at PE funds (I dont deal with HF guys) has invested in his own fund. It would be a huge red flag when trying to solicit investors.
Just because you have an LLC and a trading account it does not make your little operation a hedge fund.
I can't find the source on this, but during one 'emerging managers' conference I was at I heard one of the panelists (a woman from Institutional Investor or some other similar publication) drop a statistic that the average age of a new private equity manager launching his own fund is 51.
Anecdotally that matches what I've seen. Sure, there's all kinds of press for the venture guys in their late 20s or early 30s breaking away to kick off a $20m microfund in places like Techcrunch, VentureBeat, Axios, etc. ... but the coverage of the much more common instance of a guy in his 40s or 50s leaving GTCR or Vestar or Welsh Carson to do his own thing is buried in a less accessible publication like PEI or the PEVC corner of 'WSJ Pro' behind a paywall.
Guys at this stage in their career tend to be launching a fund only after several years of not-so-soft conversations with various people: capital sources, service providers, partners or critical senior operational employees, potential deals ... so they are people with:
(One point to make is that the prior income often includes attributable but not-yet-distributed carry payments, so during the 12-36 month process of establishing the new firm, while the guy has no salary income, he probably still has six/seven-figure income coming in the door from precedent deals.)
So to sum things up ... yes, each person involved in the new GP entity has their personal opex to maintain. However, those persons tend to be high earners with adequate runway to make it through the long process of setting up the firm. People who don't have the track record or personal funds that would lead to a successful launch generally don't even try it.
One last thing to mention is that people often accept a 'seed' investor in the GP entity, where instead of investing capital as a Limited Partner into the main fund vehicle (e.g. a $100m commitment toward a $1b target), the investor puts $3-5m into the GP entity (the corporate entitys for the 'general partner' that receives the 20% performance fee.
Illustratively, a 'seed' investor would put up $3m for a 30% stake in the GP. This $3m is then working capital that the guys launching the fund can use to cover legal, travel, and other formation expenses associated with the successful raise. In exchange, the new GPs are giving up one-third of the performance fee income that they generate.
(There is a whole variety of options for whether that 'seed' position carries over into future funds, whether it can/must be bought out by the GPs, and the economic terms around such an event.)
(Sometimes that 'seed' agreement extends to the 'investment manager' entity as well [the vehicle that receives the 2% management fee], although that's not too common. People tend to realize that a firm needs adequate capital to run smoothly and won't reach for those relative pennies.)
I know a guy who raised over $1b for his first fund within the past five years. He had a strong track record and had two partners who were more than a decade older. They didn't pursue any seed investors for the GP entity and declined all such offers that came in unsolicited. It took them just under two years to hit the final close; they did a first close just over a year in (at I think about 40% of the hard cap). They've since gone on to raise a second fund a multiple of the first's size.
I know another guy who set out to raise $125m for an industry-focused lower middle-market strategy. He had one other partner who came from an industry background and had been a portfolio CEO of one of the deals in the guy's track record. They couldn't get any commitments within the first two years and began operating as a fundless sponsor. Last I saw, they've done two deals in the past three years with family office backing. Those situations tend to come with lower economics (e.g. 1-and-10).
Mileage varies.