I work at a very bureaucratic PE firm, as having seen how the underwriting is influenced by non-deal related incentives (partners' personal incentives, politics, fund AUM cadence), I feel like I will NOT want to put my own money with my fund.
What are you guys’ thoughts and experiences, and what types of funds are you at?
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Being able to invest with PE funds as an employee is a huge perk. If you're not able to capitalize on it, then it's time to move on. All of my friends at larger funds are actively parking cash in them because the IRR is so delicious.
Why is it a huge perk?
You usually need a lot of cash to invest in PE
You also need a lot of cash to buy a hundred million pounds of bananas; what’s your point?
Thank you, OP here... I meant I think a low teen IRR seem like it’s not that distinguished. Also having seen how we push through deals based on non-investment factors I feel like it’s not a process that prioritizes returns
So one thing I struggle with is the fact that the last few years of returns have been so good. It is hard to imagine a world where low teens are considered great returns, but I keep telling myself and planning future returns on a much lower number, with hopes of a better returns than expected.
I mean if you think we'll continue to have a perpetual bull market, you're absolutely right low teens is shit returns
For most funds, employees can co-invest on a no fee basis, so you’re getting a co-invest return on gross IRR (so no carry fees)
Is the employee IRR usually net of dead deal costs and other expenses too? Or are you getting a true gross IRR?
Depends on fund specifics. Some yes, some no.
In grand scheme, carry and management fees are lionshare anyhow. Dead deal fees unlikely to be a huge needle mover. Some funds don’t even charge their LPs for dead deal fees. In that case, the fund pays for dead fees from the management fee generated.
Many firms also offer attractive leverage through their relationship banks, allowing you to invest in funds by putting only 25-35% of your own equity down.
Definitely an optics issue here given you won't be seen as a "team player" or having "skin in the game" - especially if you're more senior. Given being able to invest in the fund is viewed as a privilege, you passing on that oppty could rub certain people the wrong way.
This is a worst case scenario but based on the dynamics you described sounds like a pretty sound possibility.
Unfortunately, this is really what you have to weigh. Does your firm think you are a flight risk immediately after you turn it down. This might not be something you care about, but something to consider.
I personally wouldn't want to work at a fund (at least long term I guess), where I didn't want to invest alongside our deals. How can you work on a deal, recommend it to IC, but then say you don't want to put your own money in?
I think there could probably be a few ways you could get around this. If you say you are saving for a down payment or MBA, you might be able to skirt the Co-invest for a year/maybe two. But I do agree with you on the fact that you should want to invest in the deal that you are putting forward.
I'd be the first to defend PE, but let's not forget it's a levered return. Benchmarking it to the SPX is sort of not comparable. You would crush most PE firms if you got 65/35 leverage on what the SPX has done in the last few years.
But are you able to get 65/35 leverage at their rates...?
Yes, you easily can. The better question is can you get the same liquidity and duration match on your leverage and the answer is no. When you get a public market draw-down, you will get a margin call. How many PE firms do you think marked their assets below cost on 3/31/20.. and how many of them do you think even cared when they have 5+ year debt locked in.
This might be an ignorant question. When you're investing in an S&P 500 ETF, it seems to me like you're investing in companies that are already levered given that most companies have some amount of debt in their capital structure. I'm not sure what debt levels look like in the S&P 500 at large, but wouldn't 65/35 leverage on your ETF purchase increase pre-existing leverage?
Technically, it does increase pre-existing leverage, but I think equity prices inside this index are more sensitive to a host of other variables than simply issuer-level leverage. The reality of the S&P 500 is those members are mostly investment grade, so you're not going to see meaningful movement at the index level based on individual balance sheet decisions around debt incurrence. Plus if the mkt cap of a member ever becomes a small, levered equity, it'll get dropped from the index.
I will not invest with my fund because we don't make money. I will not stay on beyond the VP promote.
If I was down to stay in PE long term, and if I was bullish on my firm, I would 100% invest with my fund. Absolute no brainer to me, for reasons that others have already commented (ie, no fees, leverage, access to investing privately at scale you would not otherwise have, etc.)
Whats the historical IRR of the fund? If it's above 20-25% I dont know why you wouldnt invest.
Hell I would argue if it is above 15% and you feel that risk is appropriate then I see no reason to not invest. I am sure you can 15%+ returns in the public market, but what is the risk of these returns.
Very valid question - I can co-invest in a variety of funds in my new job (I used to work in just one PE fund, and would never in hell have invested in the last 2018 vintage) - we were fucking investors out of their money. Vintage in '09 where fantastic. Do you really want a 2019+ vintage?! FUCK NO
I have passed on every vintage I have seen recently. All my friend in distress can't find distress, so what's the fucking point? If we get a real down turn, a clean this whole debt mess type of economy - then yeah. Sign my money up for the next 10 years and lock it away. Today? No fucking way.
I mean you have dislocation funds that invest in stressed credits and provide liquidity to them and these are up 40-50% over the year, this is just the new distress, you just don't take ownership anymore you just inject capital to keep to company alive.
Oh man - you better hold on tight to your sit. Essentially subsidising the zombies alongside the government. I can see how you could get lucky and it works out, I also see how this could go horribly wrong in the current environment. I have clearly my own biases as to how I view the current setup so all I say to be taken with a grain of salt
I guess it depends on what industry/focus the PE funds are, but there a lot of 2018 vintage funds that are doing really well. Also, I'm sure you know this, but a 2019 vintage fund will do deals over a 4-5 year period.
It's not a bad argument, but having worked for a fund - you only get the fees when you deploy, on paper you deploy over the next 5 years, in reality you'll buy whatever dog shit comes your way. Also if you are let's say a 2018 vintage, 2019 shit, 2020 you thought would be good, it ain't. You are left with 2021 which is looking to be another bubble year. It's not giving me much hope. Distress will come, it just hasn't arrived yet.
Sounds like you should be getting a new job if you have these views. How can you work somewhere where you have so much doubt in the product. That does not reconcile.
If you coinvest in your own fund willingly, here are the 3 questions you need to ask yourself:
1) do I get something from coinvesting that ordinary investors don't get (e.g. 0 fees)
2) do I know something about my own fund that ordinary investors don't know, and which is important for projecting future returns
3) how much are my future earnings wrapped up in my fund's success, and how valuable is it to diversify away from that versus whatever excess returns I earn from (1) and (2)
I would not. Terrible returns, dunno why LPs keep getting suckered into investing.
I co-invested in one of my firm's other funds but not in my own group's because I didn't believe in the new group head's leadership and investment acumen (lol). I put in a token amount for a fund raised specifically during COVID since I believed that the opp set was too good to pass up and that even this guy couldn't fuck it up, but yeah. Most juniors in my group did not invest in any of my group's funds, but did in the same fund I invested in run by another group - really says a lot.
Imagine how depressing it would be to find out all the folks under you placed their capital with another group. A true gut punch.
As a banker, it’s funny to read people questioning someone for being able to bring deals to IC but not being willing to put own money in those deals. Would not put money in most of the companies we advise other companies to buy
What IRRs are PE funds putting up these days???
The other consideration is that you're already heavily levered to your fund's performance to begin with (in terms of carry as well as future employment and reputation), so putting even more of your money into the fund just compounds that risk. I think most funds will definitely encourage you to coinvest, but I don't think anyone is asking you to put a majority of your wealth into the fund.
LOL - just go all in into crypto man if you want a good irr.
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