For the post-MBA PE guys on the forum, how did you decide how much you wanted to invest in your latest fund? I know some funds require a minimum to get your carry award, but, that aside, how much did you put in the fund? Any important considerations when making this decision? On the one hand, it seems like a good way to park a bunch of cash in something you (and your (hopefully) very smart colleagues) are spending a lot of time on when there doesn't seem to be many great alternatives today in the public markets. Alternatively, you are already relying on the firm for your salary, bonus, and carry, so it would hurt even more if you invested a bunch and things went sideways.
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I wish I were given the choice! In both the situations I’ve been in, the funds dictated my required capital commitment. Based on my experience, your capital commitment is likely going to be your pro-rata portion of the General Partner’s capital commitment. What I mean by that is: in many cases the GP (aka PE firm) is required to co-invest 2.0% of the total committed capital of the fund out of their own pocket. If the fund is $500MM, the GP will likely need to invest $10MM. That $10MM commitment is allocated pro rata with the carry. So if you are entitled to 10% of the carry, you’re required to put in 10% of the $10MM, or $1MM of co-invest.
At the end of the day it is completely up to the partnership on how they want to allocate capital commitments (and carry), and the two don’t necessarily have to be related. However, I use the above method as a general guideline to make sure my commitment is reasonable relative to the potential reward.
Thanks CB, that is very helpful. SB'd.
At the risk of taking the title of Captain Obvious, this boils down to what your opportunity set is.
If you are really active as an individual investor and have strong relationships with self-motivated people with a degree of entrepreneurialism who are doing angel, real estate, private lending, crypto, or similar deals outside of their day job, you are probably going to enjoy enough one-off opportunities that will generate a better multiple on your capital than your fund will.
If you're one of the big majority who don't fit the above criterion, who sit at their desk and do their job for 80+ hours a week, who don't have personal flow, then maxing out your fund allocation is probably sound.
There's also a camp of people that think diversification is imperative, so they do the minimum the fund requires and spread the rest around much the way a wealth manager would. I see the logic: that you're already dependent on the firm for base and bonus, so why concentrate your income even further. I don't know that I subscribe to the logic.
CompBanker has a great answer, as always. I think that it's important to consider what else you could be doing with the money.
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