Starting your own fund is paradise

You burst into your Park Avenue office like a bat out of hell. Normally you’re accustomed to more leisurely starts – you’re a Principal after all, who’s going to say anything if you show up at 9:30? – but today isn’t any other day at Marble Arch Capital Partners. No, today is review day, when promotions are discussed, including membership in the coveted new class of Partners. You’ve busted your ass for a decade, wasting your 20s and most of your 30s on Excel and management presentations in the rural midwest. But today is the day you’ll finally get the recognition you deserve.

“We think you need a few more reps in your current seat,” Robert, your Managing Partner, says. “You build good rapport with sellers and your juniors like working with you, but we aren’t quite sure you’ve developed the judgement to underwrite independently.” You frown. This sure doesn’t sound like the lead-up to a promotion. “A couple more years and seeing a few more portcos through their full cycles should do the trick.”

A couple more years? Your work frenemy Cody got promoted at the same level of tenure you did, and he didn’t even go to an Ivy League undergrad like you (Cornell School of Industrial and Labor Relations). And to question my judgment? If Robert and the Partners are so smart, why are they letting the West Coast team do the SlagPoint Industries deal? Everybody knows that market is completely commoditized (you learned it existed for the first time when they pitched the deal in IC). Maybe the problem isn’t your “reps” at all… maybe you just have a differentiated, almost savant-like, perspective on investing that your seniors don’t get. And why should someone of your talents be forced to jump through their hoops? “To hell with this,” you say. “I’m going to start my own fund!”

The next few weeks are a whirlwind. A baffled Robert gives you a sheepish “good luck,” while your associates whisper that you must have been pushed out. “It doesn’t matter what they think,” you say as you box up your favorite Harris Williams deal toy, “they’ll find out when I’m the lead story in Axios Pro Rata.”

Your wife is a different story. While she shares your entrepreneurial spirit (she owns a pottery studio that loses $15k a month), she’s quick to point out that the mortgage on your Brooklyn Heights townhome and your two sons’ private school isn’t cheap. You try to tell her about the generational wealth opportunity you’re building, and how the sacrifices will be worthwhile. Eventually she relents. “You’re the money guy,” she shrugs, “and worst case you can always go work for my brother” (he runs a residential real estate development firm in Western Massachusetts)

You’re finally on your own and you know just where to begin — at the office of Granite Pillar Partners, your old fund’s largest LP. You talked with Griffin, their Head of Private Investments, about sportfishing in the Gulf for a full 15 minutes back at Marble Arch’s Annual Meeting. That check is as good as written. 

“…and I was a key player in Consolidator Insurance Services ahead of the 3.5x exit last year,” you say, finishing your pitch with a flourish. “Great,” replies Griffin. “And can you remind me exactly what your role was on the Consolidator deal team?”

You raise your brow. “Well I held pen on the model… and I screened a number of interesting M&A opportunities.” Griffin frowns slightly and makes a note on his laptop. “Could you talk a bit more about a deal that you personally led?” But before you can even get halfway through how you were “practically the partner” on a platform last year that’s still marked at cost, you can tell this meeting is over. “Really interesting stuff. We don’t do first-time funds, but please keep us updated as you make progress,” Griffin says as he opens the conference room door. 

Turns out, there’s not a lot of LPs who do first-time funds. Even the ones your contacts directly recommend, who you can see in Pitchbook are in several first-time funds, claim they don’t do first-time funds. And even then, they all are having liquidity issues, or are ahead of pace on deployment. What are the odds?

Maybe things would be different if you had some deals. All these LPs ask about pipeline, maybe you just need to show them all the differentiated angles you can bring (rewording the “growth opportunities” slide on page 57 of the CIM). It should be a snap. After all you saw so many deals a year at Marble Arch that you should have your pick of the litter. You call up your good friend Brad (you sat next to each other at a closing dinner once) at Slate Tower Partners to ask about dealflow. “Congrats on stepping out on your own, that’s huge!” Brad exclaims. “So how big is your fund?”

After you explain your “revolutionary, entrepreneurial approach,” Brad says that dealflow is slow and to check back in a few months. You call around and it seems like everybody’s dealflow is slow these days, even though the S&P is at record highs. You think it could be something to do with private markets, but it’s been so long since you were in a deal process it’s hard to tell. 

As you wade through more emails of polite declines on introductions from LPs, you see your old Marble Arch colleagues just closed a new platform you had been tracking for years, with Cody leading as the Partner. “You could never go back,” you think to yourself, even as a fresh invoice for another $50k of preschool tuition hits your inbox. “Think of all the autonomy you have now to chart your own course,” you think as a banker explains that you have too much closing risk to include in the process. Starting your own fund is paradise.