What's actually the crossover point for picking a $1BN fund over a MF as a career-track midlevel?
So it's been bandied about fairly frequently on these forums that MM spots at the midlevel can be more desirable than MFs in the long term because (1) they can arguably offer a better path to partnership than larger funds can and (2) the carry dollars from a scaling fund will be better in the long run if the fund 3x's instead of a low-mid 2's MF "asset allocator"- style model.
My question is what really is the crossover point, and has anyone done the math on how good the smaller fund's outsize returns have to be for this logic to hold true. I know a $5bn rocket ship could probably outperform idk H&F when it comes to individual comp, but could a $1bn VP spot really be more lucrative than a Blackstone or KKR? Are the assumptions to make the math work requiring the smaller fund to hit 3-4x for each flagship or is performing half a turn better enough for a prospective VP -> Principal -> Partner?
I haven't actually run the math, but variables that you need to keep in mind:
I imagine you could leverage the H&S comp study to then mock-up some assumptions here around comp and grants to pressure-test a few scenarios.
Thinking out loud, here's some more back of the envelope ideas:
This is logically sound math in theory.
Reality however is that MF comp is waaay higher at the more senior levels. And there’s no “cross over math” on hitting a 2x on a $25bn fund vs. a 3.5x on a $500m fund. There’s also plenty of $500m funds out there also hitting 2x returns and there’s really no barriers to entry to a high return strategy. So 3.5x MOIC really just means you’re taking more risk.
The biggest determinant of an individuals outcome at a MF is will they make partner and continued ascent from there. The biggest determinant at a MM fund is whether they’ll earn an outside carry allocation over time, so basically also if they’ll make (senior) partner.
My assessment would be in which environment/culture/style will I be more likely to make partner.
It’s a bit comical to assume that you just press the “make partner” button on the machine and it transports you there based on whether you flipped the switch to MM or MF.
This is failing to recognize a few things:
1. MFs have many, many more partners. A MF with a $25B fund might have 30 partners, whereas a $1B MM fund might have 3-4
2. Most MFs are public, so literally half or more of carry goes to the public
3. A 1.5x MOIC (not uncommon in MF-land) might not hit the fund’s IRR hurdle — so no carry gets paid at all
4. This is the big one: ~60-80% of the carry pool at MF available to the deal teams (after the public takes their share) goes to the firm’s GP, the vast majority of which goes to the firm’s top 10-20 people (co-managing partners and heads of business units)— so it’s great if you’re one of those folks, but if you’re a non-GP-owning partner (which is most), then your carry pool gets reduced significantly. True MM firms with only a few partners don’t have this additional layer — all the partners just get allocated carry directly.
5. Most MFs don’t charge 2/20 anymore on funds — might be 1.5/17 or something, whereas growing MM with excellent track records sometimes have kickers in the LP docs, where if they return 2.5x MOIC or higher, they charge 25% carry.
Overall, if you run the math, I’d argue that a partner that is 1 of 4 at a $1B-$2B fund that has good returns (>2.5x) likely has more $ actually paid out than a run of the mill non-senior MF partner. The trick here is that there aren’t that many MM firms like that — senior level is often bloated, returns aren’t that good, or some other unfortunate dynamics.
Bump
I think the promotion timeline aspect of how likely you are to be promoted at an MM vs MF as well as the growth profiles of the funds, are really what matters. There are ~$5 Bn fund size MM firms like AEA struggling to raise a new fund, whilst there are others that are smaller, like Arlington, that are raising massively oversubscribed funds, a massive difference in how to evaluate those two. IMO, both for associates and for junior levels: the difference is going to be what your chances of promotion are and how quickly you will get promoted. Ultimately for a career track path, the goal is to just get to a place where there is a pathway to partner, and given most firms do promote from within (whether that be requiring an MBA or not), you are best served going to a place with strong promotion history and a strong fund size growth profile.
Alternative take - if you’re actually in it for the long term the conventional wisdom is that you should stay at as big name of a fund for as long as possible. Most people move 2-3x in their career and typically to a smaller fund or at best a fund the same size as they’re at then - with the exception of some of the MFs who have a bit of musical chairs going on at various levels. You can do the maths on how often you can say downsize by 30%+ before the fund is so small that there economics are unattractive. Also the easiest way to get promoted is to move from a larger fund to a smaller fund vs climbing the internal slippery slope.
The truth is that a Partner takes in a single fund more carry than you would’ve been allocated all the way to Partner cumulative (or at least it won’t be far off), and at the Partner level this meaningfully scales by size of fund typically as the Partners take whatever is left after paying the rest of us ‘market comp’. Also obviously relevant if you want to get the mgmt fee economics at some point.
All that said - there have been a few rocket ships and if you were on one you will have had a great ride. But it’s impossible to know which one these will be over the next 10 years and the ones which obviously are today no longer are that same opportunity.
So long story short, take the ‘best’ offer you can get and downsize until you hit Partner.
Can i please dm you with a question? Needed your advice on something
Preferably you post it here. Otherwise if you post non anonymous I’ll dm you
Every contract you have with these guys will be different. Use reasonable assumptions and calc the npv of the seat, and remember you want to actually like the people and job. Also, never trust any number any PE person gives you about how much money you will make by working with them. As you know half our job is to lie about that
None. Both will be terrible career choices. Listen, PE is done as an asset class. It's over. It was never "investing." It was financial engineering predicated on asset valuations only increasing. Get the FUCK out of PE if you still can. There won't be any carry at all. Clearly, no one in finance has critical thinking skills because it's so fucking obvious that you should just put money into HY bonds at 9% and call it a day. Equity is cooked for the next decade. Markets go up AND DOWN. I know a whole generation has no idea of this concept but stocks DO GO DOWN.
Get the fuck out of alternatives from now on. Use your target school education and understand that if the 10 yr stays at or above 4%, most investments outside of credit don't make much sense anymore given the risk profile. It's basic math. Lower growth, higher inflation, rising rates, etc. PE was a cheat code but no longer. Sorry, but that's life.
Wouldn't HY bonds also have a high chance of defaulting in this environment? Is putting money into HY such a good idea ..
Are you going to put this under every post? It’s not even the topic. Boring
Yes
he is the Michael Burry of PE
Isn’t it just as reactionary to declare alts dead just because interest rates are higher now.. not everyone should have a JAMMBO probably but there is a place for alts until the U.S. switches to a defined contribution retirement system. Fee compression and much smaller carry checks are coming though.
Thanks for your insights! For a junior hesitating between many alts class, which one would you prefer? (credit/rx, infra, RE, and LMM/MM Buyout) Much appreciate!
FWIW even though most of the forum shits on you for this take, broad strokes / high level - absolutely yes agree on your view of macro. the PE industry will go through an intense period of contraction that will be super painful to mid to Principal levels with no real GP stake.
While this might be true, if someone joins in the next couple of years and sticks it out for 15+, they'll still be making more money than people in IB on average
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