“I will/will not invest with my fund “?

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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Comments (52)

Jan 2, 2021 - 6:48pm

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.

Jan 2, 2021 - 7:54pm

You usually need a lot of cash to invest in PE

  • Investment Analyst in PE - LBOs
Jan 2, 2021 - 6:51pm

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

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Jan 4, 2021 - 3:11pm

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.  

  • VP in PE - LBOs
Jan 3, 2021 - 1:53am

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.

Jan 4, 2021 - 8:51am

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.

  • 1
Jan 4, 2021 - 3:14pm

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.  

Jan 4, 2021 - 11:50am

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. 

  • Intern in IB - Cov
Oct 12, 2021 - 11:40am

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?

Oct 12, 2021 - 11:52am

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. 

  • Associate 3 in PE - Other
Jan 4, 2021 - 11:03am

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.)

Jan 4, 2021 - 5:14pm

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.

Jan 5, 2021 - 4:51pm

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

Jan 5, 2021 - 4:49pm

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.

  • Principal in HF - Event
Jan 5, 2021 - 9:49pm

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)

Feb 16, 2021 - 2:38pm

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.

Feb 17, 2021 - 8:26pm

Imagine how depressing it would be to find out all the folks under you placed their capital with another group. A true gut punch.

  • Principal in PE - LBOs
Feb 17, 2021 - 8:58pm

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.

Feb 18, 2021 - 2:19am

LOL - just go all in into crypto man if you want a good irr.


Oct 12, 2021 - 2:34am

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