Start-up PE Opportunity
Trying to evaluate opportunities and came across a start-up PE opportunity. Fund I was just raised ($150M). They would primarily be investing in LMM industrial and business services companies and are targeting 3 - 4 investments.
I've done a little bit of my own due diligence on the founders and can attest to their credentials. All come from an UMM fund where they've worked together closely. Not concerned about their pedigree or ability to get deals done. Fund I has been already raised so that reduces some risk in my mind.
Curious to hear about what further areas I would need to get clarity on. The team for the time being will just be an associate with plans to round out hiring during Fund II (~2 years down the road).
Have not talked comp but assume lower cash than most places with potential for carry because of lower cash? Not sure what to expect or what would be "market" in this scenario.
You 1000% should get carry and maybe a title bump.
Thanks for the response. To be clear, I would be coming over after doing my two years in banking and would come in as an associate. I don't think there is room to push on title. I also don't have any issues with the title.
In terms of carry, what % would you expect a sole associate new hire to get? Assuming it's a 2 / 20 model. Just want to make sure the economics make sense and that I'm being compensated fairly on the risk I'm taking.
You wouldn't get a title bump but maybe an accelerated VP promote hopefully if the fund performs well (i.e., 2 years -> VP).
As for carry % I wouldn't expect it to be material. Yes, you are taking a risk but you don't really have any leverage especially with just IB experience. Look at the H&S compensation package, hope they pay you in-line with other LMM funds and then maybe ~$250k DAW (~1% of carry pool). If you look at the H&S 2024 report seems like the average is about $200k but that's probably more for senior associates so if you could get that much as a 1st year associate with no prior experience I think thats more than solid.
OP here.
To add on to this and explain where my head is at – this seems like a good opportunity. Please correct me if I’m wrong or being too aspirational here, but I see this having three potential outcomes, (i) it goes well, (ii) it goes mediocre and (iii) it implodes in two to three years.
In scenario 1 – I could potentially see quicker promotion, get to help build out an emerging firm that has reputable founders, take on advanced responsibility (I’m not afraid of being thrown in the deep end) and potentially enjoy the upside of carry which is becoming hard to materialize in general across PE, all the while getting to work with people at the senior level who have done this at a well known shop for more than a decade at the Principal and Partner levels
In scenario 2 – It goes just how any other PE role would be and my WLB suffers due to the lean team but I get quality reps on leading diligence and evaluating deals and force myself to learn new things which I can carry over to another role if needed
In scenario 3 – The firm is unable to raise a 2nd fund and closes up shop but I have industry vets able to back me and help me land on my feet if willing
Scenario #3 is very unlikely unless the partners openly feud with each other -- most LPs put Fund IIs in the same bucket as Fund Is since very few will have meaningful DPI at the time they go back out. As long as the story and team track they should at least retain everybody.
The real "disaster case" risk is that you are very unlikely to get another shot in the industry if the firm isn't successful, i.e. people won't be convinced you were trained correctly or have good investment judgment. Your personal trajectory is more tied to this fund's success than it would be if, e.g. you went to KKR and the fund you invested from was a dud.
I've been in your shoes in both scenarios #1 and #3. I'm very clearly biased, but if you have confidence in the Fund's leadership getting a junior seat at a new fund is a great opportunity.
My current seat is Scenario 1 - I joined as the first junior employee and have been with the firm for a number of years. The track record has been very strong and the upside opportunities from both a career and economic perspective are what you think they are when things go right. I was thrown in the deep end early and while it has been very stressful, the experience and reps have been substantial. The benefits on getting the advanced responsibility earlier is you get more opportunities to add direct value, which if they are tangible, provides concrete data points that justify a larger compensation ramp. Put simply, the more opportunities you have for your work put money directly in the partners' pockets, the higher value you will be and the more directly that will translate into compensation. Additionally, because you were there since day 1, the partner track is really yours to lose if you outperform.
Before my current seat I was in Scenario 3 - I had joined a platform that imploded. Like some others have mentioned, the real question you'll get is regarding proper training or investment judgement. I would also caution that the "industry vets able to back me" is assumption I leaned way too heavily on. The reality is if the shop goes sideways the leadership will have other things to worry about than making sure their displaced associate gets another job. They will make initial intros for you but depending on how public the underperformance is you will run into the struggle of having a complicated story / path on your resume. If the fund has been raised already this scenario is de-risked meaningfully.
That being said - sounds like a great opportunity and would definitely recommend taking it. As an Associate you don't have quite as much leverage on compensation, though I would personally recommend signaling a desire for less cash and more carry in the discussions. If things go well you want to be anchored as high as possible for future funds if things go well.
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