Start-up PE opportunity
Currently in my 3rd year in the M&A team of a middle market IB. I have been told that I have a bright future within the firm (expressing that I could be fast tracked between VP and Director).
However, I have been recently presented with the opportunity to join a small start PE firm. I would basically be Investment Manager with only the founder above me. The intention of the fund is to invest in small companies (think less than 2M EBITDA).
While this role could give valuable experience and likely includes a competitive salary package, I am concerned that the level of responsibility may exceed my current experience. And, if the fund underperforms, it could hinder my ability to return to M&A and jeopardize the promising career path I currently have.
What would be your opinion on this?
Based on the most helpful WSO content, here are some key points to consider when evaluating your decision:
Pros of Joining the Start-up PE Firm:
Valuable Experience:
Competitive Salary Package:
Career Growth:
Cons of Joining the Start-up PE Firm:
Risk of Underperformance:
Level of Responsibility:
Pros of Staying in M&A:
Promising Career Path:
Reputation and Network:
Cons of Staying in M&A:
Conclusion:
Risk vs. Reward: Weigh the potential risks and rewards of each option. If you are comfortable with the risk and excited about the opportunity to gain significant responsibility and experience, the start-up PE role could be a great fit. However, if you prefer stability and a clear career path, staying in your current M&A role might be the better choice.
Long-Term Goals: Consider your long-term career goals and which option aligns better with them. If you aspire to have a high level of responsibility and potentially start your own fund in the future, the start-up PE experience could be invaluable.
Due Diligence: Conduct thorough due diligence on the start-up PE firm, including its track record, the founder's experience, and the fund's strategy. This will help you make a more informed decision.
Ultimately, the decision depends on your risk tolerance, career aspirations, and the specific details of the opportunities presented to you.
Sources: Q&A - Starting Post-MBA Megafund PE, Q&A - Starting Post-MBA Megafund PE, [Experience] Road to PE - Investment Analyst in a MegaFund, [Experience] Road to PE - Investment Analyst in a MegaFund, Join startup HF or pursue MBA? Seeking advice..
Up
(1) "I am concerned that the level of responsibility may exceed my current experience."
Do no worry about whether your current experience is sufficient. Kravis and Roberts never ran anything before starting KKR. Gorman's first time actually running any finance team was when he ran Merrill's brokerage business. Before that, he was a lawyer, consultant, and marketer. Josh Harris went from being a Drexel M&A analyst to a Harvard MBA to co-founding Apollo. I can keep going but you get the point. If you do this, you either will do well or you won't. "If you are good enough" should never be part of this conversation. That type of thinking will hold you back.
(2) "it could hinder my ability to return to M&A and jeopardize the promising career path I currently have."
This opportunity is almost guaranteed to "take you off the path." No one can tell you if this is worth it. We can help make sure you consider all the relevant facts, but that's about it. If you go this PE route, you can potentially be in for a lifetime of buying tiny businesses. This could pay off for you, this could not. This could also be a starting point for a PE firm that grows from the bottom of the LMM barrel to becoming a major MM player by the time you retire which would mean you'd have generational wealth. You could significantly grow a portco and then join the company in an "executive" role at the liquidity event. The firm could raise only one fund, and you could have spent 5 years at a firm with poor returns that makes it harder to lateral within the PE space.
(3) For me, it would depend on the specific details of this PE firm. How many total people would be there at "day 0?" Just you and the founder? Is there any admin staff? Has the money already been raised? What does the investment team look like? Is it just you and the founder? Will you have underlings reporting up to you basically from the start? What exactly does the compensation package look like? What is the investment strategy?
OP here.
Many thanks for your detailed response, it is very helpful.
To give more insights on (3), we are looking at a team of 2 (the founder, who doesn’t have any finance related experience but has money and industry expertise, and potentially myself). Initially, my role would be to identify investment opportunities. We won’t raise any money in the beginning (fundless) and we might need to raise money on a deal-by-deal basis (but the founder’s own contribution is expected to be sufficient). Then, my role would shift to the overall transactional process management, operational and financial follow-up once an investment has been done, etc. I would be basically alone, with the founder to take the decision to invest and then come with an operational angle. We would be sector agnostic and aiming at taking majority stakes. The compensation package would be on par with what I am currently earning, plus some shares in the invested companies (probably via a MIP)
No. Stay in banking - this is not the role to leave for.
These opportunities are always tough to evaluate. Who is the founder/what is their experience/what will their responsibilities be/where will the investable money come from/what is your experience/what will your role be are all questions that you need to have a really solid answer for. It sounds like you are in a good job with a credentialed past. My guess would be that if you were really looking for a more entrepreneurial pursuit you could find one where the economics are much more in your favor. Every biz in that EBITDA range is a loosely functioning disaster and requires a lot of hands on management and/or the biz is highly volatile.
I run a macro fund with 8 figs under mgt. I find PE really intriguing and I'm considering divesting into PE through a similar arrangement as the OP. What advise would you give? Currently I see it as scalable, growing from small deals. From your view it seems a couple deals could ruin the prospect of growth.
Really interested in hearing a variety of views
I do not know what macro fund means, but if you are planning on investing in the 0-2m ebitda space you need to be prepared to get out from behind the computer and into the bathroom to clean toilets. Hiring, firing, building a website, setting up payroll, employees leaving, employees not showing up, vendors screwing you customers suing you, investor relations?, bank relations?, actually selling something people want to buy, are all things that will happen and you will have to deal with. None of which you (I) learned in traditional finance.
Unless you are hell bent on entrepreneurship for the love of it, those are just a few reasons why you need to have the ownership and biz economics heavily in your favor when leaving a dependable and large paycheck.
Being dumber than most on here and having a burning desire for entrepreneurship made the decision a little easier for me, but I am 6 yrs in and finally feel like I have a bit of a playbook around my biz. I still have plenty of days where it feels like the world is crashing around me
Good answers so far, but generally agree this will take you off the beaten path.
How did this person find you? Is this a senior you've worked with before, or was it a cold approach by a HH? What is their prior track record, have they scaled funds before / done improvement work in this specific sector? You say you'll be fundless to start / raising deal-by-deal... that is a red flag personally, a lot of firms that are unable to raise say that. It's not an easy strategy.
This wouldn't be something I would leave for unless the founder is very established and knows how to scale these businesses. Anyone can "start a PE fund" with some of their own wealth... actually getting capital is a whole different ball game.
This does not sound promising at all.
The strength of the firm's founder is the sole factor you can really diligence here. You should make a rubric for how you can score it (the founder's strength), combined with how you score yourself.
Character:
You want to make sure the CIO is a high-performing human: "Is this person a good person, and are they an adult?"
If he's not mature, you're going to suffocate quickly because this setup lacks any checks on any aspect of their personality. Someone founding a firm alone has complete freedom to shape the office in every way from top to bottom. This means you'll face their personality in every single element of your job: how collegial it is, how flat it is, how formal it is, how bureaucratic it is, and so on. You may have heard the phrase "cult of personality".
Is he going to hire further staff? If yes, are those decisions going to be based on how much he trusts them (creating a sycophantic "my way or the highway" environment), or is there some self-awareness around skill gaps and necessary functional expertise?
If he's not a good human, your:
Relevance of background:
You mention he has zero finance experience. This is a recipe for disaster.
He has never raised money before as an investor. Has he ever raised money as an operator? It's not apples-to-apples, but at least apples-to-oranges is better than zero experience in the produce section, so to speak.
He has never overseen a business as an investor. This is also a jagged edge waiting to snag you guys.
He has likely never sourced for a living before. Are you going to see only crap dealflow that's annoying to have to spend your time on? Worse, are your investment options going to be restricted to only bad deals? This will affect your future prospects personally. Your compensation will suffer (if you are granted carry), and if you decide to leave and and can only speak in interviews about a crap portfolio or you meet people who think of your firm as crappy, you won't make a favorable impression.
He has never been a manager of investment professionals. This can easily make your life suck way worse than it would at a fund where you'd get multiple staffings with multiple different seniors. Small teams give no one any space to hide. You can't get away from a bad manager like you can in a banking group. If this guy doesn't like the way you work (and worse, has no idea how to either communicate that to you or train you differently), your only options are to adapt or leave.
Investment decisions:
Out of the two of you, who is qualified to pull the trigger on a deal? You are a third-year analyst. He has done nothing in finance.
Where is the investment committee? What is the decision-making process. What format are your memos going to follow? We could go on endlessly here.
Your current abilities:
You are a third-year analyst or early associate. I am not minimizing your achievements so far. I am pointing out that you have not yet personally experienced, let alone mastered, the full spectrum of workstreams in advisory. As a junior resource, you assist in process management and act as the smallest cog in the overall machine doing the most rote work.
(their relevance)
Advisory is an entirely different thing than principal investing. In banking, your goal is to get the thing to the finish line. You ingest data, polish it, prepare materials, and push a host of counterparties towards the desired outcome. When you achieve that outcome, you exit stage left. Rinse and repeat, on to the next one. Buy-side or sell-side, doesn't matter.
In private equity, that multi-month ordeal is the warmup for the actual game. The clock starts. You have to drive value. Oversee the actual operations of a going business run by humans who come with all the foibles and imperfections native to our species. Drive performance against a plan, not just make the plan. Herd cats all day long, day after day after day.
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I say none of this to scare you, simply to point out some harsh realities you might be unaware of.
In short, you've got a guy who is apparently going to spend his own money and maybe raise from other people to buy businesses that may look very different to those he's used to from his own career. This is rife with risks. The equivalent of running blindfolded into a minefield.
I have a remarkably high risk tolerance, and I am a consistent voice on here for stretching yourself to make the life you want happen. None of what you've shared about this sounds compelling.
Compounding that, you've described a very favorable dynamic in your current role. I would be hard-pressed to recommend this particular startup fund opportunity to anyone. It would be insane to encourage someone to leave a fast-track role with senior sponsorship and good political standing for it.
Good luck. Feel free to reply with any questions.
Thank you for your detailed answer. I’ll ask the founder further questions based on your input to assess the viability of this path. However, I indeed believe that it might not be the best setup and I might be better off staying in banking.
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