Wondering if any of the members have ever experienced a fund going downhill? Or even implode? And what the signs you noticed may have been? I would assume this would be something like difficulty raising new funds, inabilities to exit, etc. If you’ve experienced something like this, how did you handle the situation?
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Based on the most helpful WSO content, there are several signs that can indicate a fund is going downhill or even on the brink of imploding. Members have shared their experiences and observations, highlighting key indicators to watch out for. Here are some signs based on those discussions:
Difficulty Raising New Funds: A clear sign of trouble is when a fund struggles to raise new capital. This could be due to a variety of reasons such as poor past performance, market conditions, or loss of investor confidence.
Inabilities to Exit Investments: If a fund is unable to exit its investments in a timely manner or at expected valuations, it could signal deeper issues. This might be due to market conditions or perhaps misjudgments in investment choices.
Poor Fund Performance: Consistently poor performance compared to benchmarks or peers can be a red flag. This might be due to a variety of factors including poor investment strategy, execution, or adverse market conditions.
Management Issues: High turnover among senior management or key investment professionals can be a warning sign. It might indicate internal conflicts, dissatisfaction, or concerns about the fund's direction and performance.
Increased Redemption Requests: An uptick in redemption requests from investors can indicate waning confidence in the fund's ability to deliver returns.
Closed-Door Meetings and Lack of Transparency: An increase in private meetings among higher-ups or a sudden lack of transparency about the fund's operations and performance can be concerning.
Market Rumors: While not always accurate, persistent market rumors about a fund's difficulties should not be ignored.
Handling such a situation requires a careful approach. Based on shared experiences, here are a few strategies:
Remember, while these signs can be indicative of trouble, each situation is unique and requires a nuanced understanding of the specific circumstances surrounding the fund.
Sources: https://www.wallstreetoasis.com/forum/hedge-fund/fund-shutting-down?customgpt=1, Hedge Fund is Paradise, ''Don't bother joining the hedge fund industry'', Troubled fundraising processes, Anchorage Capital Group: Time to Die in 2021?
Bump
Underperforming funds in the current environment are the norm, not the exception. Many funds will decline / wind down over the next 5-10 years. The proverbial music has stopped - for now. Signs that a fund is going downhill:
1. Fundraise - how long since the last raise? Expectations for next raise? How long has the raise been in market?
2. Performance - forget about reported IRR. What is DPI? That is the only metric that matters and will matter in the foreseeable future.
3. Retention - forget about the partners - what is the talent at the next level down doing? Is the talent in the pipeline leaving?
Usually all the writing is on the wall. At the end of the day - a PE fund is no different than the majority of other businesses (with the exception of capital being in long-term lock-up with commitment fees although that will likely change over time). If performance isn't adequate, the firm will underperform.
This was really helpful thank you. When you think about DPI how do you view it normalized through time? Like if you have a fund whose DPI is let’s say 60-80% but that fund was founded like a while ago (10 years or so just for illustrative purposes). Does that change the way you view the DPI? Like how do you weigh that?
Not who you replied to but I sit on the LP side. If a fund has only distributed 60-80% of the fund's size by year 10 I'm highly questioning what they're doing, especially if said fund was raised 10 years ago in today's world (i.e. 2018-2021 was the easiest time ever to make $ and was right in the wheelhouse for a fund of 2014 vintage to be selling). Funds need to realize IRR doesn't mean a thing in the grand scheme of things as it can be gamed to death (capital call lines, selling at a low MOIC but in 18 months, etc. etc.). If you aren't giving people their money back + a return you're not getting re-upped. I harp this on secondary funds as well, most just flip shit after 18 months to juice their IRR (there's a few names mentioned on here about having stellar IRRs but nobody talks about how the MOICs are like 1.4x which sucks, they just flip assets as fast as possible).
Assume you mean signs from the outside in (i.e. you're not actually at the fund) - signs / signals to look for
This was super helpful! How much would you weigh the ability to exit and the retention of lower level talent?
If you're on the inside of an early-stage/emerging fund, pretty much the only thing to focus on is fundraising. If you see the pipeline of prospective LPs start to dry up, that's when you immediately jump ship. I've seen plenty of funds with shitty dealflow/track record continue chugging along because the partners have strong relationships with a few key institutional/HNWI LPs
Interesting, thank you for the feedback
Huge warning sign is if the fund has started hiring / letting IB analysts with only 1 year of experience start early. Sly move to try and boost associate retention given the tighter range of lateral opportunities for these types of associates once they hit the desk and realize the fund they joined is dying. Common move I've seen at a ton of struggling MM firms recently.
This is a really interesting take I’ve never heard it before! Thank you!! Particularly interesting because a few regional departments of PE firms with established names near me have starting taking 1-1.5 year analysts
The flip side argument to this is that they are so busy that they need to have people start early which was definitely happening a ton during the 2021 / 2022 time frame. Obviously things have slowed down a bit, but I recall quite a few very strong firms starting people early given deal flow back then.
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