Best path to start a PE fund
I am wondering what would be the perfect path to start a PE fund at 30-35. It would be great to read what you think about that.
Start a career in IB BB or directly in PE? What kind of networking should you focus on before starting a fund? How differentiated does your fund need to be and what would be the best place to get inovative ideas?
I've seen a ton of different paths, from MD-level bankers, to VP/Principals at upper MM / mega funds, etc. Some guys start as a fundless sponsor to build a track record. Some guys have left c-suite / upper management at strategics to start funds. Really one of those things where people come from a variety of backgrounds to found something so it's hard to answer.
In terms of differentiation, another tough one to answer because there are a lot of factors, but usually a combination of industry/geographic/size focus, e.g. industrial and consumer companies with 10-25mm EBITDA in the midwestern U.S..
Again, tough questions to answer but figured I'd take a stab at it.
Again, this is a tough question to answer and I am by no means an authority here, but here are some themes I noticed with others who were successful in starting their own funds.
Built a proven track record in a specific niche through leading deals that later generate strong exits: Obviously the Partner usually takes the board seat, but having subject matter experience and relationships can make you the one who originates the deals and to whom the relationships are attributed. Lack of a board seat also doesn't preclude you from working directly with the company post-close on key initiatives
Catered potential LP relationships early on: This is pretty important. When you attend those annual meetings, developing good relationships with those FoFs, Family Offices, and Endowments is key. Not helpful from a deal generation standpoint, but when the time comes to a) move to another fund or b) start your own, those guys can be very helpful.
Clear story and differentiation on opportunity you are going after with the new fund: If you are raising for an industry-agnostic middle market private equity firm focused on companies with EBITDA between X and Y million, you'll have a tough time, since there are many funds out there. What you want to convince LPs of is that the opportunity you are targeting has a favorable risk/reward profile while exposing them to some differentiated factor, be it the nature of the asset, or the niche industry. Then when you establish that, you need to convince them why you are the manager that will generate returns here. What is your approach? Have you done it before? How have returns in your deals been?
Hugh Myron makes a good point on the search fund. I have noticed some people who started marketing to LPs who agreed to commit to initial deals prior to a fundraise closing. In this scenario, you don't need to wait for an exit, since the LPs are given the performance of the asset each quarter. If they see that what you're doing is working, you already have the introduction to the potential investor in your fund and they now have first hand insight into your abilities as a manager.
Long winded answer, but I hope it's helpful.
You have a few options:
1) Be the king of the rat race and make partner at a really well-respected firm. This is infinitely easier said than done; there are 35-40 year old guys who are highly competent with all the right backgrounds, etc, who are stuck in VP/Principal type roles because the whole industry is constipated the closer you get to the top (and becoming moreso). If you manage to succeed in making partner prior to 35, you are probably better off just hanging out as an MD at an existing fund. You may not technically be without a boss at that point, but you might as well be, so if you ever get there, you will probably view the idea of rebuilding the capital base and infrastructure in a new firm for your ego to be an uncompelling risk/reward, or just an old fashioned pain in the ass. That said, if you're deeply unhappy (or you topped out at
2 years IB BB to gain the analyst skillset > 2 years pre-MBA experience at a top PE firm > H/S/W MBA > 5+ years at a top PE firm with a proven track record > leave with 1 or 2 more senior partners from old firm > leverage old network of limited partners / partner capital / friends & family money, etc. >
Generally, to differentiate yourself you will have spent your career focusing on a specific industry or niche (i.e. healthcare, TMT, etc.) and ensuring that your skill sets are complementary (fundraising, financial engineering, operational experience, etc.)
One point worth noting is that unlike in a hedge fund where a PM may have his own P&L and can point to his specific contributions, this is obviously more difficult in a PE environment where it would be difficult to argue that an individual is primarily responsible for performance.
Another point worth noting is that there is no "perfect" path and in many instances the path will not be a linear upward progression. Many things need to go right (many of which are out of your control) for you to beat out the exceptional odds stacked against you.
Thank you all for the precious insights
Start a hedge fund (Long short), do really well, get more money, start dabbling in privates (side pockets), do well in that, raise a separate vehicle... Is another path I have seen, especially out here (not too common, but it has been done). Of course it's ended in disaster for many as well (the side pockets that is...)
That hedge fund path is very interesting. Do you have an opinion on what would make a hedge fund successful in a first place? Can cost and positioning make a hedge fund successful assuming you don't make too many stupid decisions with long/short positions?
Everyone above is correct. Let me add it's exceedingly difficult in today's world. There are just so many funds out there and a lot of the smaller or underperforming funds are having a harder time raising capital, so going out de novo is simply really hard. 10-15+ years ago when the space wasn't as crowded it was easier and you could come at it from different angles. I know a couple of guys who launched their own fund last year and without giving them away, one guy (mid 50's) was the right hand man of a billionaire PE/RE investor and the other (later 40's) had a significant investing track record, both had recognizable industry names, and they had a differentiated investment strategy so they basically ticked all the boxes and they were surprised at how difficult it was to raise money. And they were only going for a few hundred million (small compared to what they had managed before). They did it but they thought it was going to take a few months and that people would be throwing money at them, and I thought so also.
I'd say 30-35 is impossibly young to do it on your own with other guys your age unless, as others have stated, you join your MD as a founding VP. When you think about the typical PE career, you join as a post MBA associate in your late 20's so you're just not going to have the track record or investor/LP contacts to raise any money. The most important thing to have is a demonstrable track record, individually and as a team. Money in->money out. LP's are also not stupid and they won't really attribute deals you worked on as an associate/VP, and even to the Principal level, to you because you weren't the ultimate decision maker on those deals so it wasn't your investment acumen that made/lost money.
You also need a pretty significant amount of money either in the form of personal savings or a key investor. It takes a while to form a fund legally, get office space, have employees (you may be able to get away without these), and raise capital (you'll almost certainly need a decent placement agent and while they take a piece of the capital raised and a ride in the fund, they'll want a retainer and you have to pay all of their expenses monthly), and all of that takes a lot of money. And during this time, which I'd say you'd be lucky to do in 1.5 years, you need to live. You also need to co-invest in the fund as the management team/GP's. That may only be 1% but if you raise a $300MM fund, you'll need to kick in $3MM, and the prior formation and fundraising expenses will probably cost you close to seven figures if not more (fundraising ain't cheap). Let's say three of you decide to do it: you'll each need to have a minimum of $1.5MM in the bank to do it and afford living expenses. You can make good money in PE by 33, but not many guys have that much socked away that they're willing to put completely at risk. It's also pretty essential to have a core group of investors, be they UHNW's or an institutional, who will be a core initial investor. So if you're going to raise a $300MM fund, you should really have about $50MM circled before you even reach out to other LP's. That's pretty difficult to do by your early 30's. Not impossible, but not likely.
@"Jamoldo": if I remember correctly you're in Asia (HK?). That seems like a more common thing there but I'd say in the US and London that's much less common path currently unless you started an HF 15 years that did really well and you decided to diversify and get into PE. But like you said, that doesn't seem to work out too well for many HF guys. I'm thinking of DE Shaw in particular. They got into PE in the later 90's I think and after 07/08 spun it off or shut it down.
But OP your original question of the best path to start your own fund: be a fucking rockstar PE investor, become very senior/partner in an existing, convince a couple of guys you work with or know at similar funds that you all want to be a team for years to come and throw away your partnership and job security to hand your own shingle.
Thanks a lot for that answer
@"Dingdong08" - I would not say that it is "common" out here, but it has happened (and usually not well), and I was just throwing it out there... A number of the much larger hedge funds globally do have or had PE side pockets, most of which ended up disasterously in 08 due to redemptions and illiquidity. That being said, once you have a certain size and track record, you can do all kinds of stuff and LPs may throw money at it.
The other thing (and this is MUCH more EM, FM) is to do well at a global/huge firm but in some EM/FM and lead one of the home run deals. For instance, Asia is sort of picked over, but let's say like Africa (Kenya? - pick a country) and you work for some big firm, let's say, Warburg Pincus. Why? In these places you can have less experience and head the country since there is no one senior to do it, and/or no one senior wants to be on the ground. You lead one of the country's largest deals and it brings 3x plus and gets a lot of media. You can then leave to start a "Africa" or "Kenya" fund on your own. I've definietly seen this in China/India, its how a fair share of the top homegrown guys came up...
But that involves a lot of risk. That is to say, like actually living and working in these places, oh and finding deals, and not getting ripped off, and having markets/govt on your side. and and and and.... Not easy but a way to do it young!
I'd be more focused on the why and not the how. You're essentially proposing to start a business that requires massive scale (i.e., need to attract at least $500m to $1bn in investor capital)... in a very mature market that is fiercely competitive and very much about branding and your network (in the LP world).
You've never even been a banker... much less an investor... much less a principal at an investment firm where you need to think about more complex investment issues like portfolio management... much less an executive at such firm where you need to worry about fund raising, talent management and investment returns. And you're asking what the best way to start this business? Why do you want to start it? It makes no sense. Why does your private equity firm need to exist? What do you do differently? And why should anyone invest in you? Add to that, why are you the right person to run it?
Its like asking what is the best way to start a cola company. You don't start successful business with the Wall Street monkey mentality of "it sounds really prestigious and lucrative to do X, I'm going to go try to do it." In the real world, and outside of Wall Street, you actually have to earn your keep and have a reason to exist. I'd be more focused on organically thinking about a demand that isn't being met or isn't being met properly and less about what sounds cool or impressive or lucrative.
Some of the worst decisions I've made has been with the mindset of "I want to do X" without understanding the "why", not just on a personal level but also externally as in why should anyone give a shit and why would I be successful. I'd focus on answering that, and the rest will fall into place.
Slow clap...
While most of the advice above is good and true, it more pertains to piggy backing off a senior partner on the most traditional path possible. I wouldn't really consider this starting your own fund. I don't think people on this path really do start their own funds in their early 30s. Hedge Funds this happens all the time but not in PE. Given that, I'd argue this wrong path to meet the goal (though a great path generally speaking).
Unless you are wealthy and well connected, I really only see one true path to have truly your own fund by your early to mid 30s. The path does not follow the traditional route of working at blue chips firms. Maybe a 2+2 but after those 4 years you gotta start making moves young. This is extremely risky but hell you're suggesting starting your own fund by 30-35. Basically, in my opinion the best path is buying a small company ($1-5mm). Get creative with structure - seller financing, SBA loans, seller earn outs, etc. Spend 3-5 years really operating this small business. Learn how to run a business, grow a business and ultimately sell a business. After 2+2 plus 3-5 years, you'll be in your late 20s. Do this again, with a bigger company. After 2 or 3 goes, you will have a track record and a decent amount of money. With a little bit of luck you can use this platform to raise your first fund. If you look at a lot of super successful guys with mega funds in the HF and PE world they are went off on their own extremely young and started super small, just like I outlined above.
I'd say that this approach for PE was more likely 10 or 15 years ago, or probably even more, when the industry in general was more nascent and there weren't the very established paths to PE that exist today. LP's, especially institutions and their advisors, just want to tick the boxes for any manager where they put money and they want to be able to see that they have the traditional experience that's expected of them (a game of CYA), and most won't put money with a first fund anyway. It's not impossible, but I think it's why you'll see guys with top notch operational C-level experience go out and form a SPAC rather than a PE fund.
Just because you've acquired a company or two, run it, improved it, sliced it up and sold it for parts or whatever you did to make a profit doesn't mean you're necessarily a good PE investor. You're more likely a good operator and you can work with PE funds in their portfolio companies and make a boat load of money doing so, but no one's going to throw money at you individually for a commingled discretionary fund. PE guys often tout how their operational acumen is the big differentiator between them and the next guy but outside of very few PE firms that truly are operationally focused, PE firms don't tend to get too much into the operations. Board seats, very high level oversight (basically talking to the c-level guys at the portfolio companies), bolt-on acquisitions, capital structure and financings-that's usually the extent of actually operating a company from the fund level. At most funds you don't really want to get too operationally involved because it typically means the house is on fire and all the sudden you end up in some god foresaken place like North Dakota for six weeks in the middle of winter trying to unfuck something while hanging out with roughnecks. The skills at the fund level are primarily deal driven.
Like I said, it was easier simply to get into PE in general 15+ years ago because it wasn't the more mature business that it is today-there were more operational guys, more lawyers, etc-but it's simply so much the well trodden path of IB-PE-MBA-PE (trust me, I wasn't traditional but I'm more like 15 years ago). The same can be said of raising a fund and that's even more difficult because the space is pretty congested now. You're completely correct that many of the big PE names today started when they were young-I think Kravis was in his early 30's and Schwarzman was 30's/40's, the TPG guys were around the same age-but the PE world was just much different then.
I'm not going to try to pretend to know the HF world but I feel like it's easier to raise first monies because you don't necessarily need all of you money at once because you're more of an open ended fund. If your goal is $300MM, you can still operate your strategy with $50MM and work your way up to $300MM. In PE you just can't pursue your strategy with $50MM out of $300MM because you'll end up with no diversification in the portfolio because you only did 2 or 3 deals rather than 10 in the fund.
And that's not to say the strategy of buying companies with a creative financing structure is a bad idea, but if I did that a few times and somehow did build up a track record, or teamed up with senior PE guys to form a fund, I'd rather just be on my own and continue to buy companies with my own money using creative financing techniques while owning the majority of the companies and not have to deal with investors and fund raising.
Couldn't agree more. The focus on my response was just the best way to legitimately have your own fund at 30-35. I don't think what I outlined is by any means is easy to execute and even less with home-run success. PE is definitely saturated. However, there are still a lot of Platinum doppelgangers out there that have launched in the past several years that deploy this model (to your point I'm not even sure as they've grown they've even raised "funds", rather personal money/high net worth investors). Basically my underlying point was given all the market dynamics that you outlined, its virtually impossible to launch a traditionally fund by 30-35. While no easy feat I think the start with a one off acquisition young, then rise and repeat is the only way to do it, as hard as it may be.
For the HF side, it is definitely easier because even at a relatively Jr. level 5-10 years of total experience you are running your own book and idea generating. Easy to make the leap to running your own shop. Also, a lot of fund managers will seed spin-outs, a la Tiger Cubs. To your point HFs are not close ended, again make it easier. I've dabbled in PE and I don't see the same autonomy of a P&L, idea generation, etc. especially at the junior/mid levels. A final thought too is that on the HF side investing is like dating, you can more easily move into and out of positions. Whereas PE is like marriage, if shit hits the fan you are ending in an ugly and expensive divorce. I'd imagine easier to raise a first fund to date rather than marry.
these comments are right in a traditional sense.
BUT here is another point of view. you can be a monkey slave in a expensive city hanging out spending money working your ass off really enjoying none of it and getting old. OR
SBIC. DO it. stay hyper local, fuck kenya it just adds cost- your whole idea vetting with "how many yrs do you have working in kenya?" plus investor tours in africa? ya good luck mr. moneybags....
Cut costs This means sell your car buy a beater, rent a 1br, sell anything you have that has value, get rid of all personal debt prior to this. RUN lean. NO office (executive when needed), part time CFO, couple buddies getting equity for their names on the about us page which you circulate privatly not on a website so they can get shit canned. and you are not going to tell them you want their names on a page for you to shop all over the place.
The mindset here is mel Gibson in patriot (guerrilla fighter) vs 40yr wall street vet (English army).
IF you want to hop out the box and make what a mba 1st yr associate makes in a PE firm this is not the path for you. expect to dollar avg. almost nothing for 3 yrs.
IF you suck at public speaking and cannot clearly differentiate your strategy- get training at toastmasters.
call couple funds small in other cities see how they did it. take notes.
stopped reading when I got to this part
stopped giving a F. when I read you are a 1st yr. assoc.
blame the forum for not having a spell check.
Good lord, this post is awful. On one hand you claim LBOs lack differentiation then throw out SBIC. As for the rest, I cannot control my laughter enough to type a response.
Do you think that there is is still room for the development of value-oriented funds such as Oaktree or do investors now have to add value themselves to their investmens (for exemple through LBO or turnaround)?
This is an awesome fucking thread, seriously.
Keep the info coming, fellas.
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