I was wondering if it was common for people to work at Blackstone, KKR for say 3-4 years post-MBA, learn the skills of the trade, build limited partnerships contacts, become proficient, and then start their own private equity firm? Is this a common route and what are the limitations? Why don't a bunch of PE VPs, senior associates at these top firms just leave and start as their own Kravis?
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How are you going to raise the hundreds of millions if not billions of dollars necessary to perform a single leveraged buyout? Can you stomach the risk?
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People leave PE firms and banks all the time to start their own funds. It's highly risky though (fund-raising risk in particular), and they don't do it about 3-4 years post MBA. They do it after maybe 12-18 years post-MBA (in their forties), which is about as early as any LP's will really start to trust you enough as a fiduciary... you're also going to need some start up capital to build up a team, perhaps do a showcase deal and sustain during fundraising... and we're not talking about 1-2 million, I'm talking 20-40 million. There may also be some junior partners who are younger (35), but I'd venture to guess that most guys starting their own PE shops are at least 40. The partners that founded my firm about 5-6 years ago are between all between 45-70 and brought substantial millions to the table.
I've heard of HF's being started by younger guys regularly, but that's not generally how it works in PE and REPE.
Depends on the type of PE firm. Lots of younger guys start growth firms, which often have much better ROI.
It depends on a few things. The first is how much money you've got. If your family network and trust can kick in a sizeable ($20mm+) start, you may be able to scrape enough together to do a deal and use that deal to raise a fund. However, why would someone invest in a VP when they could put that money in with someone who has been making investment decisions for 40 years? Even at the VP level you aren't pulling the trigger on deals. It's completely different to do deal support and processing than to sign a check.
Senior people do. For example, Mark Gallogly was head of PE at BX and Jeff Aronson led distressed/loans at Angelo, Gordon and they left found Centerbridge.
HFs seem more likely to be started on a smaller scale by younger people-maybe more scalable nature (you don't need to raise $500mm to start) and a less relationship-driven investing process? That's really more anecdotal though-a lot of funds are started by former desk heads or top PMs at big funds or banks and are born with a lot of AUM.
Its pretty hard to raise hundreds of millions of dollars when you're at a principal level. Most of my MDs don't even take calls from principals seriously, usually just fork it off to a VP... so if a banker who could potentially make fees off of you doesn't take your deal ideas seriously unless a partner-level person is on the line as well, you think he (or someone like him) is going to give you THEIR OWN money? Not likely.
As for the above posters comment, you don't need hundreds of millions or billions of dollars to do a single LBO. You could get by with $100 million fund, which is very hard to raise for a run of the mill principal level PE guy. You could probably do two $50 million to four $25 million equity checks, maybe , possibly side-by-side with another investor.
I'd personally go that route, try to raise $100 million on a "LP discretionary" basis, i.e. they have approve of the investment when you call their capital. So you'd use your contacts to invest alongside them... so Kohlberg & Co. is acquiring a company, you put in a $50 million equity check alongside theirs.. you go to your LP and say Im calling capital for X investment, its a kick ass thesis, and Kohlberg and Kelso are also putting money in. Obviously, Kohlberg & Kelso don't need you to help fund a deal, thats the hard part... so you'd want to identify a solid deal and bring it to them in to help bridge the funding gap, obviously you'll have to have a pretty strong relationship with your counterparts. Another issue is you need to be pretty confident before telling your MM PE contacts you've got money ready to invest side by side. Since you need their involvement to help get the LP to fund, its a bit of a chicken and egg scenario. Essentially you'd have to get commitments well above the 2-1 ratio, since its on a discretionary basis.... maybe 5-1, or more. You don't want to identify a killer deal, pitch it to some MM PE guys who will invest in it as well, and not be able to fund your portion.
Thanks for the insight, that's really helpful.
I was recently talking to a few alums of my school who are ~mid 30's, top bank/top fund/top b-school alums now working at well-known PE shops and I was a little surprised when they both said they couldn't see starting their own fund, regardless of scale, for at least another decade (so call them 45ish). They were much more focused on making partner at their current fund.
Does anyone know what the mechanics of making partner are like (either at a PE or HF)? I am familiar with the process at accounting firms and somewhat at law firms but imagine it must be pretty different, especially since so many asset managers are so founder-driven.
It'll be interesting to see what happens to all these funds when their partners start to age. Big ones that are able to IPO like a KKR/BX/Carlyle seem to have figured it out but what is the end game for those places? Does KKR just keep going post-Kravis?
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