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higher level quesition: is the private market frothy right now? I'm more in tune with public markets where spreads are tight, I can only assume that on the private side it's similar. if you could talk generally about valuation as well, that'd be interesting.
Yes, almost all data sets I've seen put average LBO purchase multiples at record highs. It's the same story from every GP pitch I've heard: debt is cheap and easily available (particularly, covenant-lite lending is significantly up), there's a lot of dry powder to go around, and strategics have a lot of cash. Very good news if you're exiting now and we've seen a lot of recent liquidity from 2010/2011 vintages, and tough environment if you're early in your investment period.
Correct. Mostly buyout, a good amount of venture/growth and a few other strategies here and there like credit and infrastructure.
thanks for doing this, i'll put it on the frontpage now
I'm guessing you only deal with private funds, VC -> PE?
When looking to invest in a new fund, what is your due diligence and administrative process?
Great stuff, thank you for taking the time. What's your opinion on Search Funds from an LP perspective?
The analogy I like to use for our diligence process is that it's probably very similar to how you look at a company, just at a higher (fund) level. For example, you'll research/evaluate the sector a company is in, we'll look at a fund's strategy compared to the macro environment. You'll meet and have discussions with management teams, we'll meet and have discussions with the GP's investment/operations team. You'll analyze historical financials, we'll analyze historical returns.
Very similar process. A lot of it is fairly qualitative since, unless you're going into the final close of a longer fund raise or a deal is already warehoused somewhere, you have zero insight into the fund in which you're considering investing (secondaries is very different, but I have limited experience there). If valuation is 50/50 art/science, primary fund investing is probably 67/33 art/science.
Not sure what you mean by administrative process? Like how we find, evaluate, and ultimately make investments? To continue with the analogy, just like a banker would send you a CIM, GPs will send us their PPM, or a placement agent will make an introduction. From there, if it looks interesting, some initial work is done around it and if a VP-level type or above finds really interesting, it'll go into full diligence described above and presented to investment committee.
Not sure what you mean by search fund - is that just another term for a pledge fund? (i.e. you go out and raise capital on a deal-by-deal basis?)
If so, I don't believe we've ever personally invested in one. However, I think it's an excellent way to go and build a track record before launching a fund.
Thanks for the AMA.
Just wanted to follow up on the above. From what you've seen and regarding pledge funds or raising money on a deal by deal basis: what type of backgrounds do founders of these deals have and what kind of experience is valued (e.g. VPs at IBs)? Are the "founders" typically placed in operational roles (i.e. executive positions within the company) or do they just source/structure the deal/provide oversight/etc. more like a traditional PE firm? Also, what size of deal is typical? What does the typical LP/GP compensation structure entail? After a successful exit from a singular deal, what would the path to raising a traditional PE fund with committed capital look like?
All of this is spot on. Kudos @"Hugh Myron" I could not have put it any better
To add to a comment above on GPs bullying LPs, it's all about power, right? If a GP has been crushing performance, then they can name their own terms (or try), not talk to many people, be opaque etc and people will still give them money hand over fist, it also helps if your LPs are understaffed, overworked, or just don't care that much (all quite common). If performance has not been great, it's the other side of the coin... Then, regardless, you have the OTPPs/CPPIBs and some others who most certainly will negotiate to death anything they can and really push GPs around. Not only are they big checks and potential co-investors, but they are also organizations that a lot of other LPs follow. So say you are looking to raise $3bn, Maybe it's been a bit tougher than you think and is taking some time. Then CPPIB comes in with a check of $150-$300, or something. Lots of others will follow that check. Why? It means they think that CPPIB is diligent and has done a lot of work and has approved it. It also means that the people making the call, can mitigate some blame if things go bad by saying "see? CPPIB was in it and it didn't work out..." This is not a joke and I have seen it happen. More than once.
On another comment regarding OTPP doing a direct deal, we've been seeing lots of guys trying to co-invest and claiming they will do direct deals in Asia. I don't know how these guys can attract talent to "source and underwrite" deals on their own when there will be like no upside (when compared to working with a PE firm) and how they can juggle this with fund investing/secondaries and other opportunities (ie. there are only 24 hours in a day). I think it will all end in tears in the coming years.
I am one man looking forward to tears in Asia, whether it's from PE funds who have gone into China half-arsed or pension funds who have gone in quarter-arsed.
Good stuff. Do you invest in first time funds? What would you say the break out is between first time funds vs. existing? How much weight/credit does one get running a group at a prior fund and then going off on his/her own? Is he/she given full credit for their prior deals or is it more so let's wait and see what you can do on your own? How does the diligence process differ? Thanks.
Yes, we've invested in first-time funds before. It's not terribly common as you would imagine, but we have done them. Track records at past firms are definitely considered, but we do look at it closely and verify that the investment professional claiming those deals actually has full attribution for them. I've seen two different spin-outs from one GP before and their track records had two or three over-lapping deals where each claimed to be the lead - that's not good. The best thing you can do in this case, assuming you left on good terms, is to have a statement from the prior fund confirming your lead on your respective investments. Reference checks will be especially diligent for a first-time fund and will uncover any misleading or deceptive representations of past performance.
First question I'll have to answer with a follow-up PM.
Second question, I think fees are going to remain relatively where they are with no monumental changes. Generally, I think different LP share classes will become more popular. For example, you can enter as Class A and pay 2/20, or Class B and pay 1.5/25, etc.. I have seen a couple of cases of this and expect it to grow in popularity since everybody likes choices - it just means I have to run some annoying sensitives to see what makes more sense.
Some buyout GPs are trying to get away with tiered carry (e.g. in addition to the 20% after an 8% pref, carry steps up to 25-30% after some metric, usually a certain DPI, is achieved) which isn't uncommon on the VC side, but I think the pushback from LPs will limit this in the buyout world.
Most funds seem to be adopting the 100% offset as standard.
No, and we've actually turned down re-upping in GPs where we've had historically long relationships with because of poor performance.
Not sure what the "GE" acronym stands for - growth equity I assume? I've always thought growth equity was a little weird since everybody seems to have their own definition for it, and some funds will market themselves as "growth buyout" to try to make it sound less venture-like than it actually is, etc. When I think about the risk-reward there, I usually think of it as more venture-like if the majority of prior investments are EBITDA negative and more buyout-like if the majority are EBITDA positive, in terms of comparison to peer funds.
In terms of investing in funds vs. companies, I think it's just ultimately a diversification play and "easier" in terms of not going out and having to do all of the heavy-lifting involved with direct investing, while still presenting attractive returns over a long time horizon.
With that said though, I am trying to make the transition to direct PE investing soon, since I think I've learned a lot of important transferable skills from this role. This kind of move definitely isn't the norm though but I've seen it done.
How much credence do you give to the advice of consultants? How do you see the market developing around fee structures?
Gracias for the insight!
Are there situations that come up where you basically have to deploy capital into funds even if you don't want to, and how do you deal with them? How does the risk/reward compare with GE to PE from your perspective of investing in the funds rather than the companies themselves?
Finally, do you invest in European or other internationally focused VC funds, and if so how do they compare to what's going on in America right now in terms of trends and general frothiness?
Sorry yeah, by GE I was referring to growth equity, and what you said is inline from what I've gathered as well though I think GE funds tend to only target positive EBITDA firms.
There's typically a flight to quality and mega funds emerge, but mega funds have difficulty maintaining long tail returns due to their size. Are you sensing a growing risk tolerance towards investing in emerging, newer PE/VC/HF firms (the future Blackstones, Kleiner Perkins)? If so, what characteristics of these upstarts interest you the most?
Is there any advantage of being an investment firm in the home-town/home-state of the LP headquarters? Do LP’s try to cultivate local firms, at least to a small extent?
Thank you
What kind of people do you guys hire, could you perhaps describe your role a bit and compare and contrast it to the hf/pe world that we're all relatively familiar with here on WSO?
Have you ever picked up someone from a GP?
How is comp structured? How does it compare at the various levels (junior to senior) relative to IB or PE/HF?
Do you allocate to HF strategies? Why or why not? More generally, how do you feel about Calpers eliminating their HF exposure?
Thanks for doing the AMA thread.
Do you push for direct coinvest rights alongside your LP investments? If so, what sort of rights are common in today's market? What's the trend been over the last few years on LP coinvest asks and rights?
There is definitely some fallout from most of the upper-MM/megafunds not doing so well through the crisis. One of the results is a lot of them are pitching their refined strategy as sort of a "returning to our core focus" and focusing more on MM-sized deals, using less leverage, and fewer club deals. Some have started to demonstrate this, but will it last in the coming years? I don't know. There is definitely a strong following for the top MM guys and they're frequently over subscribed.
In terms of locality, that's an interesting question. We personally do not invest in any firms local to us but have given them an extra look just by virtue of being neighbors. One interesting thing to note, though, is that some mandates like this do exist. I'm making this up for sake of example, but suppose the Oregon Public Employees Retirement Fund wanted to establish an in-state economic stimulus program and set aside part of their PE allocation. They would use this to invest in funds that deploy most of their capital in Oregon and try to co-invest in these deals as well. They're interesting programs because they're designed to not only generate a return for the pension, but create job growth and enhance the local economy as well.
Backgrounds are really from all over (I assume you mean at the senior level) including corp dev, PE and banking. Probably what you'd expect in that regard.
In terms of comparison to direct pe/hf, I'm afraid I can't offer too much insight there as I haven't personally worked in a role like that. I think the above post where I give a high-level overview of our diligence process might give somewhat of a comparison to direct PE - very similar, just that things are done at a much higher level (fund vs. company). I'm an analyst and do the same types of tasks as what I imagine analysts/associates do on the direct side.
Yes, a few people, mostly higher up, were formerly at GPs (middle market). The lifestyle really is pretty good at the senior level...
Comp can be really variable but overall is not particularly compelling at the junior level. On an absolute basis I definitely make a material amount less than an analyst in IBD, but I'm not NY-based so CoL-adjusted it's not bad at all. I've heard stories of what seniors make though, here and at other firms, and it sounds great. 250-300k+ as a VP, working maybe 50 hours a week in a non-NY location is cushy in my humble opinion. Have heard higher figures for my NY peers as well.
An important note on comp too is that it will vary with the type of LP you're at: fund of fund, consultant, family office, public pension, university endowment, foundation, SWF etc. Public pension comp data is available online.
In terms of HFs, no - I work solely on PE funds. So not much of an opinion on Calpers' move there, except wondering what implications it'll have on their broader alternatives strategy and what their PE allocation may do in the future.
No problem.
Co-invest is an interesting thing. What I hear from GPs is, everybody is always talking about wanting more co-invest, but very few LPs actually have the sophistication and capabilities to make it happen in a timely fashion.
I'm admittedly not very in touch with our co-investments, but it is definitely something we like to see to boost returns (every co-investment we do is no fees/carry which I imagine is pretty standard now). We've also been offered board observer seats but generally do not take them, in fact I don't believe we ever have.
I can try to ask some colleagues and other friends in the industry with more co-invest experience what their views are if you're curious, but in summary: the demand for it is rising, although most people can't get to the table in time; LPs do in fact like it when they can get it; and economic terms are generally on the same basis as the GP.
Thanks for the answer and no need to follow up with your colleagues (although, if you do, let me know).
Although we're a bank with our own IBD and other business, we've put some LP money into PE funds, essentially to buy a "house bank" role ie handshake that we'll get M&A and DCM roles on the PE fund's deals.
That's brought coinvest opportunities (although not rights) and I agree that it can be difficult to get there in time on coinvests, even when the LP is an execution-focused IBD who is advising on the deal. We have managed it, but I imagine it's a lot harder for institutions which aren't as nimble as we are.
On the other hand, for some institutions, I would have thought that you could treat coinvests a little like LP stakes ie "we don't have much control on how the PE fund invests our LP funds, so we may as well invest 75% as LP money, then blindly coinvest the remaining 25% as direct coinvests and pay no fees on the coinvests".
On the other other hand and contrary to last paragraph, coinvests don't always come up and it's not like the coinvest LPs can just pro rate to their LP stake exposures, so an institution would probably face unattractive and undiligenced asset concentration issues if it blindly coinvested. Probably some breach of fiduciary duty to the institutions' beneficiaries as well.
Good stuff @"Hugh Myron"
Just to add to the co-invest and even direct investment from LP's, I think it's talked about more than it's actually done for all of the reasons already stated and because most (and yes, there are exceptions) LP's (pensions especially, endowments, etc, maybe not FoF's as much) don't have the function built out in house and it's tough to staff senior people into roles to build that function out. I was recently talking to a friend who's a consultant to LP's and he put it like this: in order to poach a senior PE guy, because that's who an LP would want, to build out a true direct/co-investment function, they'd have to get a guy who's probably making millions per year. Most pensions couldn't come close to matching that comp in the short or long term, so it's really tough to bring in the quality of person you'd want to build that function out. He said he think's people will continue to talk about it and maybe try but he doesn't see much actually coming of it.
True in many cases on the salary thing. However, we are seeing in Asia that a number of folks from big PE shops are joining LPs like CPPIB who pay OK and give the illusion of much better hours (CPP's hours here are terrible as is the work atmosphere from people I talk to in the know). But guys like OTPP definitely work better hours, the pay is decent and you are powerful. Some other shops are definitely looking to set up an office here (mostly to be on the ground and monitor). As a result of these folks being on the market, a number of shops (the Canadians, some FoFs etc. are really putting together co-investment/direct teams).
Now why would someone talented from a GP jump ship to an OTPP or whatever? It's easy. The upside in Asia for most is NOT there. If you are a junior MD or some kind of VP/Director, to make it to the next step is brutal because you probably can't source the big lucrative deals that senior guys can (or they will take credit for it). Not because you are any worse at your job (though this can be the case) but because you don't have (what is often and I cannot stress this enough) THE PERSONAL NETWORKS. In other words your mom and dad were not the right people, you didn't go to the right school etc. You might be technically good, but if you were truly awesome, you'd get promoted or poached away. So the LPs will get 2nd/3rd tier people from top PE shops (by percentages most people including us here are 2nd/3rd tier, so no shame in it). So you're some smart Harvard grad/MBA who has done the banking/PE thing and is sick of working 100 hours a week, not seeing much promotion possibility or share of carry, and not getting to enjoy life at all and you are in your mid 30s-mid 40s.
I'm guessing that it is very different in the US, though.
Follow up (much appreciated, shooting you an IB), is there a career track / hierarchy / clear path for advancement?
You mentioned the diligence is similar, but I'd imagine the process of diligencing a company for a direct investment (building out models, talking to SS research, etc) is different from diligencing a fund manager's track record... I'd be curious - how does responsibility change over time?
+1'd, again thanks for the time.
Thanks.
In terms of career track, it's fairly narrow. Most organizations like this tend to be more top-heavy so advancement can take a while. Exit opps are fairly narrow (another LP / type of LP like FoF, family office, consultant, pension, SWF etc., IR at a GP, business school) which is why I'm trying to make a lateral jump to either IBD or direct PE/VC - on that note, if anybody here appreciates the advice and has any insight on how to make such a move, feel free to PM :)
As for responsibility changing with various levels, and I'm sure this varies from firm to firm, but from knowing peers at other LPs I think I can say this is a good high-level assessment: the analyst prepares all of the analytic work and the investment memos, the associate checks it and occasionally helps with more complex analysis when necessary, the VP/Principal level oversees the process, and the MD level focuses on higher level things like portfolio construction and GP relationships.
Another one of those things that can be all over the place. Could be a group of ex-bankers VP and above, could be a few guys who left a bigger GP, could be a mix of those two with an industry executive or two thrown in the mix - it can really, really vary. But in general, it's a bunch of rich guys with rich friends (HNW / UHNW) as their first LPs. Off-hand, I can think of one GP I diligence'd that started as two guys raising money deal-by-deal. One was a former VP at a well-regarded GP and one was an MBB-type. They also hired a former IBD analyst or fresh undergrad (I forget which) as an analyst to do the modeling work.
In general I would say definitely more sourcing/execution focused - with limited resources, it's tough to go in as an operator so you're generally making an investment where you think it has a great incumbent management team. Comp structures can vary again - I've seen ones that were solely 20% carry with an 8% or 10% pref and no management fee and I've also seen 1.5-2% management fees for invested capital with 20% carry.
As for the path after that, I don't know what one exit would be enough to prove out the thesis. The group I referenced above had 4 deal-by-deal exits when they raised their first fund. They were very small deals too, like Thanks for the answer and no need to follow up with your colleagues (although, if you do, let me know).
Although we're a bank with our own IBD and other business, we've put some LP money into PE funds, essentially to buy a "house bank" role ie handshake that we'll get M&A and DCM roles on the PE fund's deals.
That's brought coinvest opportunities (although not rights) and I agree that it can be difficult to get there in time on coinvests, even when the LP is an execution-focused IBD who is advising on the deal. We have managed it, but I imagine it's a lot hard for institutions which aren't as nimble as we are.
On the other hand, for some institutions, I would have thought that you could treat coinvests a little like LP stakes ie "we don't have much control on how the PE fund invests our LP funds, so we may as well invest 75% as LP money, then blindly coinvest the remaining 25% as direct coinvests and pay no fees on the coinvests".
On the other hand and contrary to that, coinvests don't always come up and it's not like the coinvest LPs can just pro rate to their LP stake exposures, so an institution would probably face unattractive and undiligenced asset concentration issues if it blindly coinvested. Probably some breach of fiduciary duty to the institutions' beneficiaries as well.
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The "house bank" part is interesting - didn't know much stuff like that went on. I guess I can add that "staple co-invests" go on in the LP world, where a GP will give you $X in co-invest on a certain deal with the understanding that you'll commit $Y to their next fund. Same thing happens in secondaries too.
Another thing that's thought about with co-investing, which you touched on a bit, is to counteract some of the blind-pool risk. Say you're in fund that focuses on diversified industrials, and you want more energy services exposure, and they happen to bring along an energy services deal where they need some more co-invest capital, you can adjust your sector exposure that way.
Thanks again. Just two quick follow-up questions.
1) What size fund was raised by the group you referenced (who had 4 deal-by-deal exits)? 2) Also, just to clarify, would the individuals mentioned, e.g. former VPs at banks, be embarking on these ventures full-time, or during their "spare time"?
Good read, thanks.
Why does it seem like you guys do zero diligence and let yourself get bullied around by GPs? At least if the last fund at which I worked is any indication...
Somewhat longer answer: some LPs do because they lack either sophistication, resources, or both.
With sufficient capital to deploy and the resources with which to deploy it, LPs can be the bullies in some cases.
Ontario Teachers is a great example of this.
Thanks for doing this, a great insight into a part of the sector that usually is hard to come by. A few questions here, apologies if I have missed the answers to these anywhere above, but it would be great to hear your thoughts:
1) Placement Agents - do you use them, do you think they add-value (if so, exactly where and how much), do you think they will continue to thrive going forward? If you do use them, how much of your own DD do you do on the GP on top of the Agents?
2) What are your (LP's in general) biggest concern at the moment, fees, regulation, competition, etc, and going forward through the next cycle? Do you see a significant shift in power from GP's to LP's?
3) I appreciate you touched on your DD process above, but if you had to pick only one piece of information to analyse (management team / past performance / current strategy, etc etc) that enabled you to make an investment decision, what would it be and why?
Many thanks in advance! Ciao
For more established GPs with bigger platforms, I don't think there's much value-add there. Maybe if they had some big LP turnover and needed to bring in new capital it'd be worth it to hire a placement agent but that's about it.
For us, they can be annoying when random ones keep calling/e-mailing you over and over again trying to pitch a fund you've already rejected or some weird new fund you've already said you don't have any interest in seeing.
As for power dynamics, bifurcation comes into play here too based on performance. When you're good and massively oversubscribed, you have the power. When you've been a middle-of-the-pack or worse performer, it shifts back to LPs.
Thanks for your prompt and detailed response. I've PM'd you a further question.
Re: #3 how do you think about realized vs unrealized IRR, and the relative size of the two? In other words, a $1B fund near the end of its life might be showing great realized ans unrealized gains, but what if 75% of the portfolio remains unrealized?
There is definitely (and apologies if it sounds obvious) an emphasis on realized returns. When the unrealized portfolio is large, this is where we'll take a deeper dive into those companies to try to get some sense of expectations around the ultimate exit timing and what kind of return it'll generate. We'll want to see their financials and discuss it with the GP's deal team and also try to get an idea of where the fund, in aggregate, will end up.
Another thing to think about with a large unrealized portfolio is getting comfortable with the idea of the GP raising a new fund. Is the GP raising too much additional capital? Are they spreading themselves too thin between deploying capital vs. managing out existing investments? Is the team growing commensurately with this?
Why aren't you CEO'ing 300k a day like Zyzz brah? Please respond.
Thanks Jamoldo for the Asian perspective.
Soon. We're all gonna make it.What’s the best performing fund that you committed money to in the past 5 years?
What’s the best performing fund that you committed money to in the past 5 years?
Not sure how much I can say on this specifically, but I will say that the group that has really stood out to me in terms of outsized performance is Vista.
Great thread - thanks for taking the time to educate us all on this segment of the market that a lot of us don't know about. Could you speak a bit more on your background, experience and why you chose the LP path?
In hindsight, did you think it was the right path for you?
Unfortunately my answer to this question will be pretty lame. I started right out of undergrad, choosing this gig since it was the first offer I got and I stopped recruiting (was in the process with some MM banks).
In hindsight, I would've done banking, honestly. While I've learned a ton in a niche that's pretty unknown (as you noted), it just isn't as transferable as I initially thought.
How do you think direct private equity groups in reknown LPs (think Temasek, CPP, OTPP..) would transfer to GPs or other buy-side positions ?
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