Owner/Operator (GP) vs. LP
Despite the hundreds of threads regarding this topic, I’m bringing it back…cause that’s what monkeys on WSO do.
Comparing the two, what do you think is the better career path for an investment professional when evaluating them holistically?
While LPs typically have higher base and bonus, GPs generate outsized returns on good deals and employees can earn a slice of that. Agree/thoughts? Are there examples of operators paying higher cash comp than their LP counterparts?
Also, what’s the better choice for younger people (22-30) when it comes to building a strong foundation for their careers? What will lead to greater dividends down the road - working at a GP or LP early on?
Unless you are already rich, working at a GP translate a lot better if your goal is to "go out on your own" one day.
What do you want to be doing on a day-to-day basis? Being a developer and/or operator is a whole different way to spend your day than being in private equity.
As someone upthread mentions, there isn't a right answer to this. It depends on what you enjoy, what you're good at, what your risk tolerance is, what you want out of a career, etc.
Some people would be happy to pull in a quarter of a million dollars a year for the rest of their life with no risk, good WLB, and no real stress. That's totally fine! Some people want to roll the dice with their entire net worth every couple years to pull together and entitle a brownfield deal... that's fine too! But what is a terrifying and awful path for one person might be amazing for another; by contrast some people will be bored stiff and miserable working for someone else.
Also have been wondering this
at a GP and i'm getting lots of reps but not closing so it all seems like imaginary work lol
Feels like im doing analysis/writing memos for school
I've been on both sides. The answer: it depends.
The GP side is great if you get in the right seat. Multifamily operator in 2019-2021 where you had a sizeable piece of the promote? Hope you're going to church and giving your thanks. Office operator in 2023-24? Talk about depressing. It also comes down to shop culture and size. There are some pretty large GP's that will probably comp you better on cash, but there are also some 4-man shops out there that are growing and you could get into a VP seat and basically set yourself up where you're doing whatever you want with your day and eating what you kill.
The LP side is great, to me, only if you get into a more entrepreneurial shop. I personally wouldn't want to work for a multi billion dollar LP shop. Why? It probably pays great but I joined real estate over finance because I can't stand corporate culture and that's where you'd find the most of it (besides the debt side I suppose). I now work for a more entrepreneurial LP. Our funds are only $500m - $1b at a time but we can cover all sorts of product types and markets and our team is small. I've really enjoyed it because I basically get to field potential deals all day and decide where I think we should be placing our money, and the deals I work on actually have a large impact relative to the fund and company size. I probably wouldn't want to work on the LP also if I was just at the type of LP, that say, wants to invest $1b into multifamily only the next 5 years and I'm just churning multi deals all day and have to make plays regardless if I think multi is the right place to be right now.
A great part of working for a GP is your promotes usually aren't crossed, so you can make some nice coin when you make a few good deals even if some of the other ones suck wind. You also get paid every time a deal sells instead of waiting for an entire fund to close out which often takes a decade. On LP, you're usually in a fund structure meaning a couple bad deals could ruin the promote on an entire fund that you waited 7 years to pay out even if the rest of the deals did okay. Plus you don't get paid until nearly the whole thing is sold out, and as mentioned I've seen many scenarios where folks think they'll be invested and sold within 5 - 6 years and it ends up taking over 10 years.
Another part I didn't enjoy on the GP side is basically the capital raising. Most GP's need to find the capital on a deal by deal basis and they often find good deals that they tie up then can't capitalize and you oftne spend just as much time trying to convince a capital partner to do the deal with you than you spend on finding or operating the deals themselves. When I was on the GP, our LP turned down over 5 deals we wanted to do one years and all of those deals would have made a killing if we bought them. It's been nice to be the LP and only have deals brought to me that we say yes or no to, and if we say yes it's off to the races.
GP side will give you a lot more hands on opportunities if you're into that. I didn't find it as exciting after a while to be worrying about pricing out finishes on a multifamily renovation, but other folks live for that kind of stuff.
The capital raising part seems to be a problem right now - Not sure if it's just my shop
The firm and principles have great track record and have long relationships with LPs but nothing has materialized...
I do like doing the analysis but it sounds better for comp/ career early on at least to be at a capital distributor where people bring you deals and you actually close..
Not sure how to progress from here
I mean, if I was a capital allocator I would certainly be hesitant to deploy money.
Rates are going to come down (further) in the future, but I don't think the new normal for the next decade is going to be the same as it was for the 2012-2022 decade. Without knowing what that is, how can you evaluate terms, both for your internal investors and for external deals you chase? Having a 6 or 7 or 8 as a hurdle was market during the last cycle, but if rates are going to settle 200 bps higher than it stands to reason most people investing are going to want to see an equal premium to that in their private investment vehicles. Having the reputation for really aggressive and management-favored terms might harm your ability to raise money in the future, while being too investor-friendly will hurt upside.
A lot of people saying LP side is more corporate. Generally true. However, I could see having LP experience being useful for capital raising which is hugely in demand. If you demonstrate ability to go raise capital for deals, you’re gonna get PAID from what I’ve seen.
How easy is it for someone with LP experience to raise their own LP fund? Guessing it mainly goes off previous track record?
Much harder than someone with GP experience getting a deal funded as a GP, which is already insanely difficult.
I would say starting a fund from scratch and raising the money, assuming it isn't from daddy & daddy's friends, may be the hardest thing to do in this industry.
There's a reason the GP side is still 50/50 institutional vs. wild west while the LP side is probably more like 99/1
As CRE mentioned, extremely difficult. More typically you'll see someone with LP experience do a small deal on their own as a GP (friends and family money, etc.). They'll grow that until they have a track record over a decade or more and turn that into raising an LP fund. Even that is very difficult. LP funds are generally all institutional investors who have a very tough process to get approval on and they won't give a first time fund money without many boxes checked.
And honestly, most people that start doing deals as a GP and find enough success that they could raise an LP fund won't want to go raise an LP fund. They'll have made so much money on their deals as the GP that they'll just continue that route. If anything, those GP's will go raise a fund specifically to deploy in their strategy. Many multi GP's go around and raise a $100M fund from their go-to investors to deploy into 10 multi deals with discretion vs. raising capital. Different than raising an LP fund where you'll be investing the money with other operators instead of your own deals.
I also wouldn't doubt that your LP experience gives you ability to go to a multi GP deal on your own. Many of the successful guys I've met had debt side or LP experience only before going out on their own.
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