What type of MF group would you want to be in for the next 5-10 years?
Almost all MFs now have a variety of funds employing different strategies: classic buyout, special situations/opportunistic, credit, real estate, growth, etc. Given how things are trending economically and in respect to fundraising, what type of MF strategy would you want to be in for the foreseeable future? Is buyout PE still the most desirable/best career path, or would the capital flexibility of a special situations group be better even if it’s a smaller fund size? Is real estate looking at potentially outsized returns? Does credit make the most sense given higher interest rates and a favorable AUM/IP ratio?
Disclosure: currently trying to figure out what style of investing I’m most interested in and what makes the most sense to recruit for.
Wouldn’t do MF PE. MF PE is an obsolete market. It probably is one of my biggest mistakes. Market is too crowded, fund size isn’t growing. It’s a lot better than most seats in finance, but it’s not what it used to be.
If I were younger, I’d be going for one of the structured equity / credit funds. That will be the new big growth area in finance. They’re still finding their footing strategy wise, but once they will, it will be the next leg of growth in private investing. Think it will become increasingly attractive as LBO returns compress further and corporates look for more sophisticated solutions to deal with their capital structures.
Is this like Bain Cap special sits/BX tac opps?
So don’t take the MF because it’s commoditized, but take the fund where MFs line up ten of them in a race to the lowest possible pricing and terms? Make it make sense.
Pretty simple: They’re not there yet. You’re assuming timing doesn’t make a difference. It does. The life of my partners is still great - what will the economics be when it’s my time?
Is MF PE going to be the same for an associate at BX PE that is going into a team that hires analysts out of university? Or was it better 10 years ago?
Plus, where are the returns of 90% of MFs? Not everyone is CVC, and I’ll leave it at that.
Credit is doing no carry funds already now… yes PE has to deliver more coinvest but at least you can still make serious money without having to have shares in the GP
That’s super interesting. What’s the typical management fee for a credit fund? I’m surprised carry is 0% for some funds
What credit funds are doing no carry? Must be multibillion fund with heavy fees
I'd still want to be in pure play PE. Largest funds raised, leanest teams (broadly speaking), prospect of outsized carry, most in-depth work. Private credit may be dominating all the headlines these days, but little carry, lower management fees from what I've seen, less intellectually stimulating. I mean, sure it pays to sit at or near the top of a $300B credit manager like Apollo or BX, but how many of those seats are out there? Happy to hear differing views, but that's my impression.
I don't agree with the lean team argument though, all the MF I know (think BX/KKR/Advent most teams) put super heavy deal teams on live deals - have you seen very different things elsewhere?
KKR has lean teams in my experience - typically no more than 4
Idk what you’re talking about both KKR and Advent have pretty lean deal teams in US. (I’m sure BX does too but I just don’t know anyone there firsthand).
only MF I have heard has slightly heavier teams is Bain Cap
Take HPS/BX Credit/ Ares/ Apollo Credit and its peers as an example, MDs are making multiple millions a year and get material carry that actually pays out consistently. The Senior Loan Funds alone at top credit shops are paying out that carry in 5-6 years instead of 10-12 and they get exposure to the higher upside 10-12 year funds like Mezz. That’s meaningful for an MD in their 30s and 40s.
sure, superstars, yes. but the average/median MD at the firms you named are not getting "multiple millions" in cash pay + carry on top.
Agree buyout is still best. Credit is hot now but we’re already seeing fee compression - see new Carlyle fund that is no carry. I know it’s a different strategy or whatever but it should still be concerning - no one in 50 years of corporate PE has tried to raise a “no carry” fund.
Structured equity is also unconvincing to me, feels like now it’s just a plug for PE funds because debt market sucks. Don’t really see a broader use case outside of the PE world (I don’t think Microsoft is going to go raise a nice dilutive PIK preferred from BX tac opps for their next M&A…). So you’re still linked to PE fund performance in the end and if/when cheap debt comes back, everyone will stop raising structured equity.
I think sectors are a better question for MFPE, think there will be tons of changes to the landscape.
- tech: my personal view is long term (I’m talking 20 years from now) AI is going to eat this sector up. Obviously will still be tech but I think AI is going to create fewer winners. I switched groups but used to be in tech, PE has won in tech because there’s so much niche vertical software (think accounting ERP for mid sized gas stations), but AI will probably just mean Microsoft and Google can go crush all these smaller players. VC backed AI bets are probably a better bet which won’t help PE.
- Healthcare: government is already targeting roll ups in the space, can’t imagine this will be lucrative in long run. There’s other ways to make money but that was the easiest, think eventually PE will be pushed away from this sector.
- things I think are safe: industrials, services, consumer, energy. Even if we live in an AI utopia we’ll see still need people to go repair HVAC, make the screws that go in light bulbs, and people will still buy crap. That’s my 2 cents
healthcare is much safer/better than energy imo. roll-up thing is a joke/non-issue
We’ll see, FTC just sued welsh Carson over one. There’s certainly political pressure on healthcare PE and there’s some risk in the longer term in my opinion
Know several people at port co's of these HC practice roll-ups for one of the most well known players in this space and they all say they are absolutely screwed. Talent is terrible, doctors realize it's bad for patients and competition is insane where practices are going for 3-4x what they were 5 years ago with worse economics.
Fair points. I’d keep the following in mind:
1) Those are evergreen credit funds at two credit arms that haven’t been performing well. Regardless, credit teams invest out of many funds for the same deals. It’s a very different model with a materially higher AUM per capita vs PE funds. I wouldn’t read too much into it.
Would an evergreen PE fund with a Euro waterfall work? No.
2) “Large cap” structured capital funds aren’t working with Microsoft. There are new pockets of capital in private credit that are starting to go towards that, but not these structured funds. They also don’t work primarily to plug the gap in cap stacks, otherwise they wouldn’t have been around 3-4 years ago. They do because the risk reward is better right now as a bunch of PEs are stuck with assets they can’t sell.
3) MF PE is becoming increasingly less important for the MFs. The two largest MFs, BX and Apollo, are no longer PE firms at their core.
4) Large LPs, like GIC, are starting to discuss doing P2Ps and taking on more direct buyouts. The returns from large cap PE have been pretty dismal, apart from very few exceptions. They’ll compress further, particularly as Western economies grow at lower rates.
5) MF are asset accumulation machines these days. PE is not a growth space. Simple as. Check what Marc Rowan has been saying for a while. Sure, you might be smarter than him. I know I’m probably not.
From a career standpoint MF buyout 100%. Returns? Who knows?
Curious what everyone's outlook for infrastructure PE going forward is
Big growth area. As funds looks for fee-generating streams, infra is a great asset class on the equity side. It locks up capital over the long-term without running into too many issues with marks or monetisations (because you can hold these assets for longer vs corporate buyouts).
The knock is that returns might compress as sovereigns try to keep infra costs down, and LPs do have very strong expertise in core infra.
One of the biggest / most successful growth stories at KKR, for example, has been their Infra businesses.
General theme I'm seeing as a junior in infra is that equity investors are looking at 1 of 2 strategies to keep returns acceptably high - either go into emerging markets, or move earlier in the development stack. Interested in your views as to which strategy will play out better over the next 10-20 years.
Is it enough of a growth area that you'd consider all-in comp for the next 15-20 years at the Partner level competitive wtih, or even surpassing, MF / UMM PE?
I would imagine the special sits groups at MFs with broad mandates would be the best choice, if not classic buyout. Can’t those funds basically invest in anything, meaning they can switch to whatever is attractive at that point in the economic cycle?
We need precisely none of your jew-hating garbage. Begone.
Curious what everyone's outlook for real estate PE going forward is
Bump
After the repricing is done, I see a good outlook for the asset class especially with a wave of distressed assets coming on to the market (perspective from opportunistic buyers with a lot of dry powder).
After the repricing is done, I see a good outlook for the asset class especially with a wave of distressed assets coming on to the market (perspective from opportunistic buyers with a lot of dry powder).
After the repricing is done, I see a good outlook for the asset class especially with a wave of distressed assets coming on to the market (perspective from opportunistic buyers with a lot of dry powder).
After the repricing is done, I see a good outlook for the asset class especially with a wave of distressed assets coming on to the market (perspective from opportunistic buyers with a lot of dry powder).
say it one more time
After the repricing is done, I see a good outlook for the asset class especially with a wave of distressed assets coming on to the market (perspective from opportunistic buyers with a lot of dry powder).
Agreed, real estate probably has some of the highest upside after this reset, will continue growing in focus as a MF PE strategy. Currently trying to make the move from corporate buyout to real estate.
As an infra PE muggins I am obviously biased, but I genuinely think Infra/Energy is already and will continue to be the flavour for the next few years. The tailwinds of energy transition, digitisation etc. are era-defining - it's quite a compelling investment theme to say that if we do not go green, we will literally die out as a species lol, as opposed to what the latest social media app is. It also makes me feel that the work I do has SOME benefit to society, which helps as I get older and more jaded about life in general. Obviously these are huge generalisations and I would like to caveat I am not at Macquarie and was not responsible for the Thames Water debacle lol
Just wait til the restructurings start en masse, no one will care about Greta the Hamas Supporting climate vigilante when it comes to their money.
The only issue with investing in the energy transition despite regulatory tailwinds is the sector / technology itself is very nascent and often times, the growth story that these companies are pitching is rosy to say the least. I think at its current stage, it's a hard ask for smart, institutional capital given the early-stage nature of many of these targets, questions around large-scale commercialization and scalability, and the fact that it will take several years before you can see any returns on your investment (if any).
Conventional renewables are still viable but returns have largely been compressed given higher rates and the sector maturing across many of the developed markets. Difficult to meet return hurdles unless you take on development risk which isn't easy.
But generally speaking, I think you're right. Infrastructure and energy sectors will continue to gain momentum and are here to stay for the long-run - just have to time it right and be very prudent on where you allocate capital.
Shocked I haven’t seen Secondaries mentioned in here. I’m not in the space, but it seems like an obvious choice. I’m tempted every day to join a Secondaries shop - the growth is extremely compelling.
Would love to hear some thoughts.
second this
secondary this
Thoughts on special sits/opportunistic groups (flexible capital) at MFs?
Bump
Well no more QE, heading into a new/old normal of 2 recessions a decade on average
Do you want to be in the most highly sensitive sectors: tech, industrials, energy, cyclical parts of consumer
Real estate / infra / industrials / consumer hands down, in no particular order
MF secondaries
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