The VP Promotion: "Marrying" a Fund

Hey folks – I've been more of a ghost than a contributor on this site for most of my career, but as I have reached a part of my career where I view myself as a wise fool.  With that spirit, I’d like to share some of the views and questions I’ve been grappling with recently with regards to a VP path at my current fund (keeping it general intentionally). Welcome any challenges and other perspectives to help refine my thinking. For a bit of context, I’m currently a senior associate at $1 to 5Bn fund and, of course, an “incoming MBA Applicant” to all the top MBA programs, where I stand little to no shot at matriculation.  

"Marrying" a Fund – Exaggerating a bit for effect here but the promotion to VP feels like you are "marrying" a fund especially as the golden handcuffs start to tighten. That got me thinking: how should I approach evaluating whether I want to make that kind of long-term commitment to my current fund? A few considerations I’ve been reflecting on:

• Ease of Fundraising: We’re currently raising another $1-5bn fund and have been in the market since mid-2023. While we’re nearing our target, we’re still about ~$500M shy of our hard cap. I understand the fundraising market has been difficult, but it seems like we are really reaching for dollars as we make several trips to countries across the globe. Furthermore, we had to amend our fund documents from a mid teens term to closer to 10-years. Since I haven’t experienced a fundraising cycle in a market like this before, I’m trying to contextualize what this says about our positioning in the broader market. Is this simply a reflection of the current fundraising climate, or could it signal deeper structural issues that I should weigh when considering my long-term alignment with the fund?

• Long-term GP Considerations: Our founder, while not particularly active, still controls over 50% of both the management company and the carry pool. Within the partnership itself, we have fewer than a handful of members with stakes in the management company, and one of them is set to retire this year.  Given the size of the fund, I see succession planning as a challenge – both for the retiring partner and potentially for the founder. It seems likely that transitioning will eventually require selling a portion of the management company and carry pool to a non-producing partner, such as Blue Owl or a similar entity. While this doesn’t weigh heavily in the near-term career implications, I see it as a long-term concern if I were to pursue the partnership track here.

• Returns: Our earlier funds have delivered great results, with IRRs exceeding 25% and MOICs surpassing 4x while subsequent funds have yet to see significant realization events – a challenge consistent with broader industry trends. We are forecasting IRRs in the high teens and MOICs just above 2.5x. That said, there are several portfolio companies that are dogs given challenges surrounding exits. While some investments maintain a low carrying multiple, I see more downside than upside in our current valuations. Compounding this, one large portfolio company from an earlier fund – a quite the "whale" of a hold period – may require incremental equity (1/10th of that fund’s size) to stabilize operations, and with reserves fully tapped, I struggle to see where this money is coming from. Looking ahead, I anticipate these subsequent funds may achieve mid-teen returns, which, based on vintage benchmarks, would place them in the lower half of the second quartile. That said, I understand that every fund experiences periods where returns soften, and I’m struggling to contextualize whether this is cyclical or indicative of a larger trend.

• Industries of Focus: Our fund operates with a broad mandate across the consumer, industrials, and services sectors. However, we consistently avoid paying multiples required to compete in industries with strong tailwinds. Anything above low-teens multiples – especially in a competitive process – would likely get shot down by committee. From my perspective, this approach creates significant challenges. Investing in stagnant or declining industries often requires either taking market share or excelling in operational improvements – neither of which aligns with our current skill set. This limits the upside potential of our investments, given the constrained growth prospects, and introduces a need to underwrite multiple compression in some cases. However, no partner here would openly incorporate multiple compression into an underwriting case while trying to push a shitco through committee. In my view, this dynamic will likely result in a meaningful drag on returns.

• Differentiation: I find it challenging to pinpoint a truly unique angle that sets us apart from other firms in this space. Much of the positioning and messaging across firms—ours included—feels strikingly similar, almost as if there is some plagiarism… This lack of clear differentiation makes it difficult to articulate what gives us a competitive edge, especially in such a crowded market segment. Everyone has their spin, but it isn’t truly unique, just said differently.

• Politics: Having worked at seven firms throughout my career, this is the most politically environment I’ve encountered. While I assume some level of politics is inevitable in private equity, the dynamics here often feel like I am back in high school. I would conjecture that this dynamic stems largely from a lack of a strong feedback culture. People seem more inclined to discuss issues behind closed doors rather than addressing them directly, but alas, above my paygrade…

• Upward Mobility: Our firm currently has a relatively heavy middle management layer but is lean at the partner level. While the path to VP and principal seems clear, I struggle to see a realistic trajectory to partner. I could envision the firm adopting a KKR-style model, introducing an additional title between principal and partner. This dynamic leaves me contemplating the timing of career moves. One option would be to take the VP promotion, gain additional experience, and then look to recruit externally if the lack of upward mobility becomes an issue or the path becomes elongated. However, as mentioned earlier, the "golden handcuffs" tied to our vesting schedule could make that a costly decision, potentially leaving significant value on the table.

• Compensation: Ah, we saved the fun one for last. Before diving in, I want to understand what market is these days, but given my ignorance to date, I am not going to stop now…

  • Meritocracy: The firm seems oriented, especially at the associate and junior VP levels, to compensate folks based on tenure instead of merit. For example, an associate who is widely regarded as underperforming, working a 9am to 6pm, might receive a $100 bonus, while top-performing associates, who take on significantly more demanding roles, are paid $105, only slightly more. As an aside, it did cause one associate to leave earlier this year given the massive disparity in the work-to-pay ratio.

  • Carry: Is carry typically granted posthumously across all funds that do not have realizations or prospectively only in the fund currently being raised? I’ve heard both approaches, but prospective grants seem to be much more common. At my current firm, carry is granted prospectively. However, one of the deals warehoused in our current fund is struggling, marked at around 0.5x given my firm struggles to understand the difference between cash EBITDA and PF Adj. EBITDA…This raises another question: Will carry be granted at the current mark, given it could dilute the existing holders? Also, how do folks typically value carry? Based on public equity research, it appears most folks assign a standard 20% private equity hurdle rate to these streams. That might overvalue carry as it doesn’t account for vesting schedules, only the likelihood of performance. On vesting, seems like the structures can vary significantly (e.g., a 4-year cliff versus evenly distributed over 7 years), so I am struggling to assign values to these streams as I compare alternatives.

For the folks that got to this point, I am sorry…  Kidding aside, would love to hear perspectives. As I re-read this message, I realize it comes off as pessimistic and I do not mean to imply that, this list is more of my considerations versus a list of merits.