Is PE FoF and Co-investing a dead end?

red08's picture
Rank: Senior Monkey | 93

In the process right now for VP level roles at lower MM shops. I keep getting calls from folks about PE FoF and co-invest opportunities at higher levels (Principal / Junior Partner). Firms are similar to what AlpInvest or HarbourVest were 5-7 years ago. Would be a decent lifestyle and pay vs. lower MM shops, but is it a dead end?

Anyone at one of these shops who can comment on lifestyle, pay, advancement, etc?

Comments (32)

Mar 30, 2015

I'm sure it's a decent job with good lifestyle balance and pay. I interact with one of those two big guys you just mentioned regularly and they seem to enjoy their work. Probably smart people as well. Generally the junior guys are all former IB analysts, etc.

However, if you want to be in PE, i don't think it's the right move. Although I don't have the extensive experience to opine on your question, I once talked to a founding MD at Bain/KKR who said, and I quote, "FOF is where you go to die".

Mar 30, 2015

Yep that's my sense too. What about co-investing?

Aug 18, 2015

What did you end up doing?

Jan 29, 2016

I have experience working in all investment banking, hedge fund, direct PE, and now FoFs/Secondaries/Co-Invest. My view is I enjoy what I do now the best, and I find it's probably the best long-term career path for me, having left the other 3 jobs on my own decision. If you're doing FoFs/Secondaries/Co-Invest at the right place, you can progress relatively quickly up the ranks, have a very good work life balance, and at the mid to senior levels start making total comp not that different from MDs at I-Banks once you factor in carried interest, with potentially more upside based on performance of funds. The job pressure is lower, travel is less, and the business model is fantastic - make a primary committment to PE firm, and wait for their call to be invited to co-invest, or purchase a secondary in the market when it becomes available - you don't have to go "chasing" for new deals as you would at a direct buyout shop or as an MD at a bank. So in terms of the comment above, FoF is "where you go to die" - as long as the firm is diversified, and not just doing FoF (also doing co-invest, secondaries, and other related activities), and if you're looking to build a long-term career with a good upward trajectory and lifestyle balance, all the while making very very decent comp, it's not a bad gig to have.

    • 4
Jun 11, 2016

seconding the above, just recently joined a Secondary and Co-Inv shop from doing IBD at one of the BB's (focusing more on the latter), my fund has 30bn AUM and offers carry as of VP level. One of the partners in our team made 3m GBP total comp this year so you can kind of see where career path could lead to if your fund is doing well. I doubt anyone in M&A makes that kind of money in todays regulated market.

Jun 11, 2016

very very very tough to make LP to GP switch unless you have some angle (do an MBA and go back to GP side, build a really close relationship etc). Or unless you want to do IR.

Jun 11, 2016

Thanks Jamoldo. But I guess it doesn't help either by staying where I am now, unless it's a fund that focuses very much on FIG.....

Jun 11, 2016

Have you talked to headhunters? If you spin it the right way, maybe you can get into a generalist PE fund. They want modelling/ppt skills more than anything else... HFs also a possibility as a FIG person but then trying to be in a generalist FoF (you would just be good at FIG is your key in)...

Good Luck

    • 1
Jun 11, 2016

Jamoldo, thanks a lot. U are very helpful. Realized that you are actually in HK (is it still the case?), may be I can PM you once I get enough bananas (if you dont mind).
You are right, given my deal experience (completed 4 insurance transactions, inclu. one buyout, in 2 years, quite rare in a heavily regulated industry like insurance industry) and given my background, it wouldn't be a problem to jump to a small to medium sized PE shop here in Asia. Had interviews with a few. But I guess that doesn't really turn me on since I think my exit options wouldn't be that much better (e.g. I still can't go to a top global PE shop). I might be even better off staying where I am given the brand-name and the recognition my current team has in insurance M&A (sadly only). For example, in one deal, Blackstone knocked our door and invited us to partner with them to submit a bid.
That said, I'm not like many monkeys here who see GP as the ultimate goal of their career, but would just want to keep that door open just in case in the future (now almost shut guess if i choose FoF). I'm still figuring out what i want to do in my career, or i would just want to be an entrepreneur and start something of my own.

Jun 11, 2016

You can always try to do FoF later but a lot of "impressive" FoF candidates don't make it because they are not social enough and can't ask the big picture questions. They have been trained to have been robots and not think about big picture things, which as an LP you absolutely have to do. It's not better or worse, just different.

I am in HK so ping away. Remember that most Asia PE funds are not very good (ie. they don't make much money actually) and even the mega funds are not performing that well consistently, they are mostly seen as a a safe pair of hands by many LPs. You have options though..

Good Luck

Jun 11, 2016

Jamoldo, interesting comments. How is FoF more "big picture" than direct investing? Given that FoF (both HF and PE side) is just allocating assets to various funds without direct risk taking or intense research into the holdings, it seems like you're just a middle-man who is divorced from what's really going on.

Jun 11, 2016

I had a call with the associate in the team who's leaving due to family reason. She actually told me a lot of people in the team left for GP...I'm not sure if it's easier in Asia or if she just wants to create an illusion to lure me in....

Jun 11, 2016

Direct investing especially in illiquids (though often liquids as well) means you will be getting into the weeds of the company and doing things like channel checks, talking to competitors, sitting onsite for DD etc. FoF, is asset allocation. You need to have some sort of informed but basic view on sectors, geographies, strategies and how they have or may perform in what scenario, rather than, say a few companies in the consumer white goods sector in China, of which you are targeting 1-2. You have to have an appreciation for relative value. Am I picking China or India. Or both?Or Neither? If so, what split? How have funds in each performed? Ok.. growth, buyout, vc or distressed? Ok.. What in each? Ok, whats in the marketplace raising money? Then you have to actually diligence the fund and see if they aer actually making money, or enough of it. You do visit portfolio companies mostly to assess the GPs investment methods and thinking and value add (its shocking how bad some of these guys are or how little they do - you feel that they made a decision to invest very quickly and have made the models and ppts just to bolster their case). Plenty of these guys definitely do takes risk (ie put it into hedge funds/pe funds, that is another form of investing)...

On the middle man comment, as a consultant who does pretty much what FoFs do but gets paid less, I cannot agree more about the divorced from what's really going on comment. You are at a much higher level. You can only know so much about each and every fund and what it is doing since you have 20-50 of them. Then again, how much does a PM know about his 50 positions, probably not a ton, that's for his/her analysts, hence the importance of trust and risk management... There are only 24 hours in a day...

Let's face it though, most people in finance are middle men. You can invest on your own in stocks directly as well as, say spot fx and some other asset classes. Despite all this research most equity managers (MFs/HFs) do not beat the index (yes I know I am ignoring volatility here). If you are an individual you probably don't care about vol much and you don't monitor it, you just don't want to lose all your money. Pensions/Endowments etc, could theoretically spend the money on people and infrastructure to do so directly, but that brings about all kinds of questions and issues... But hey, these HF guys will do it for you for a fee, so you can worry less about your investments and do something else with your time/resources. That's classic middle man. Investment banking is classic middle man. If I had a company, I could theoretically try to raise capital from PE/HFs on my own, or list or whatever. Or if I wanted to sell my company, ditto...S&T, middle man. FoF's go back to my example of equities above. Most institutions do not have to time or bandwidth to research/meet/dd thousands of HF/PE managers. They just don't. Hence FoFs/consultants etc. Of course they could easily just choose GS or Carlyle products across the board, many do, but we all know that doesn't work in anyone's favor except those investment firms (fee $$$$$).

    • 2
Best Response
Jun 11, 2016

I agree that the FoF to GP switch is difficult, but certainly not impossible (seen it happen several times), and some FoFs are better than others in that regard as there are some (and growing) number that also have significant co-investments programs were you do invest directly.

Cool things about working in a FoF (provided you also do some co-invest):

- Your firm will have data on pretty much every GP and thus every PE owned company in the world. Have some downtime and wanna know about the business of Formula 1? Pull up the relevant CVC quarterly report. Wanna know what exactly went wrong with Texas Utilities (Energy Future Holdings)? Read KKR's original IC proposal.

- More importantly; you will get to know the industry and all the players in it, and when the time comes you want to switch jobs you will personally know Partners at many GP's which eases your disadvantage versus M&A kids in the switch to a GP.

- You will probably realize that Mid-Market GP is infinitely cooler than Megafund because Megafunds are completely undifferentiated (like BB banks) and basically all the same firm with a different logo. In the MM there are still some real differentiating strategies, plus there is more money to be had because the road to the top is shorter, carry can be earlier and better, you will have more responsibility etc. Coincidentally, MM GP's might just be a little bit easier to get into (particularly if you know the people) than Megafunds.

- When you get interviews, you will absolutely ACE any LBO case study they can throw at you. This mostly applies if you are going to compete against kids that have done a few years of M&A. Yes, they will know more about pension provisions and differences in depreciation for tax and book, but that knowledge is easily trumped by actual deal experience from a buyside perspective. As a co-investor you have crazy deal flow and will close 3-4 deals per year, for each of which you will build a new or modify a GP's lbo model and be involved in full analysis of the DD materials.

- Work/life balance is really good. No working on weekends ever, most nights free as well. Pay is lower than GP but still easily higher than consulting and effort-weighted (hours+stress) compensation is probably the best of a typical monkey's entire opportunity set. (this has downside, it can be boring sometimes)

- There seems to be a trend going on of some large 'proper' LPs (pension funds, sovereign funds, etc) insourcing their PE primary and co-investment activities, although some big ones are also outsourcing. In my opinion, if you want to do FoF you would want to aim for one of the firms that has a more GP like approach and culture. Firms that come to mind are: HarbourVest, Goldman, Alpinvest, Partners Group, Adam's Street. Also GIC (Singapore sovereign) is pretty sophisticated.

    • 5
Jun 11, 2016
John D. Peckerson:

I agree that the FoF to GP switch is difficult, but certainly not impossible (seen it happen several times), and some FoFs are better than others in that regard as there are some (and growing) number that also have significant co-investments programs were you do invest directly.

Cool things about working in a FoF (provided you also do some co-invest):

- Your firm will have data on pretty much every GP and thus every PE owned company in the world. Have some downtime and wanna know about the business of Formula 1? Pull up the relevant CVC quarterly report. Wanna know what exactly went wrong with Texas Utilities (Energy Future Holdings)? Read KKR's original IC proposal.

- More importantly; you will get to know the industry and all the players in it, and when the time comes you want to switch jobs you will personally know Partners at many GP's which eases your disadvantage versus M&A kids in the switch to a GP.

- You will probably realize that Mid-Market GP is infinitely cooler than Megafund because Megafunds are completely undifferentiated (like BB banks) and basically all the same firm with a different logo. In the MM there are still some real differentiating strategies, plus there is more money to be had because the road to the top is shorter, carry can be earlier and better, you will have more responsibility etc. Coincidentally, MM GP's might just be a little bit easier to get into (particularly if you know the people) than Megafunds.

- When you get interviews, you will absolutely ACE any LBO case study they can throw at you. This mostly applies if you are going to compete against kids that have done a few years of M&A. Yes, they will know more about pension provisions and differences in depreciation for tax and book, but that knowledge is easily trumped by actual deal experience from a buyside perspective. As a co-investor you have crazy deal flow and will close 3-4 deals per year, for each of which you will build a new or modify a GP's lbo model and be involved in full analysis of the DD materials.

- Work/life balance is really good. No working on weekends ever, most nights free as well. Pay is lower than GP but still easily higher than consulting and effort-weighted (hours+stress) compensation is probably the best of a typical monkey's entire opportunity set. (this has downside, it can be boring sometimes)

- There seems to be a trend going on of some large 'proper' LPs (pension funds, sovereign funds, etc) insourcing their PE primary and co-investment activities, although some big ones are also outsourcing. In my opinion, if you want to do FoF you would want to aim for one of the firms that has a more GP like approach and culture. Firms that come to mind are: HarbourVest, Goldman, Alpinvest, Partners Group, Adam's Street. Also GIC (Singapore sovereign) is pretty sophisticated.

Wow well said! I'm enjoying my FoF role at a small place where partners are willing to send me to annual meetings to network with GPs and other LPs. The exposure at FoF is incomparable.

Jun 11, 2016

The network and access to top people as well as information is incomparable as is the networks one can build. That's not a question (and one of the reasons I am on this board to help people out). However, to make the actual switch can often require a HUGE personal relationship built with the GP or someone in charge (or some hook), since a lot of them will want model monkeys and guys fresh out of banking are just that. You might understand businesses better, have a better top down view, know how to relate to senior management, know the markets etc better, but they won't care. They will be hiring for a specific thing.

The other thing will be how you are viewed. Often you are just viewed as a client or prospective client and of course they will be nice. But you will be bucketed as such, an LP... It will be "John Doe is a client and has this much exposure to us" NOT "John Doe is a client and is super smart and wow I want him on my team to do deals"

That being said if you are one that can build that rapport and relationship, it can definitely happen. Most people who do move from FoF/LP roles however, to GPs, do so in an IR and business development (actually running the shop, hiring, compliance, fundraising, etc) stuff, which can also be lucrative but they are not doing deals. I would also argue that most or many co-investors are not actively underwriting and doing their own models. They are testing GP assumptions, going to some DD meetings and relying heavily on the GP for DD and also using co-investments to actively reduce their fees on invested/committed capital. Sourcing and doing deals is typically not their full-time job hence "co-investments" rather than just "investments." Even those that do underwrite their own deals are relying heavily on the GPs DD and other things. This is compared to an M&A person who is doing models all day, 12-15 hours a day (ok that might be an exaggeration, it might not). Let's face it, if they were really good at it/wanted to do it, then they would be at a GP, sourcing deals at the company/sector level and have more upside of making money if they do well. There are also lots of people that leave GPs to do FoF/Co-investments as well...

In other words, certainly do-able but tough and not an ideal path.

Good Luck

Jun 11, 2016

Interested in this as well. Is it possible to lateral into banking after working for a few years? Does off cycle hiring still occur?

Jun 11, 2016

Bump

Jun 11, 2016

Interested in this as well except I have a little different background... coming from a start-up healthcare information security company where I'm currently running marketing and sales and would like to transition to IB. I have been here 1 year (currently 22 years old) and figure MSF would be my best route to make the transition?

OP - how old are you/how long have you been there? It may be a good idea to consider the MSF too if you don't have enough experience to apply for MBAs.

Jun 11, 2016

I'd nix the PWM, regardless of how good the brand name may look on your resume. PWM really has bad exit opps (believe me, I know wayyy too well).

I'd go with the other two options, with a slight edge towards the investment consultant. The pros of that opportunity are 1) brand name 2) lots of transferable knowledge about alt investments. The con is that the question "why switch from consulting to investing" may be slightly more difficult to answer. However, since it's an INVESTMENT consultant, that risk should be mitigated a bit.

Jun 11, 2016

Thanks for the response. I guess I figured the PWM was pretty relevant, considering it's AM for individuals (rather than institutions, which is where the difference lies with my goals). Additionally, I was under the impression that there is SOME analytical work (asset allocation, portfolio construction and selection, perhaps some pricing models), and that the BB name would carry weight.

Besides what I listed, are there other positions I should be seeking out?

Jun 11, 2016

You are right - there is some analytical work. But you are not going to learn as much as in other areas of finance/banking. Moreover, PWM doesn't look as good on a resume compared to the other options you listed.

Jun 11, 2016

not sure about the details, but I know a VP at my firm who made the transition from a F of HF's to M&A without an MBA, so it doesn't seem totally out of the realm of possiblity.

Jun 11, 2016
kidflash:

not sure about the details, but I know a VP at my firm who made the transition from a F of HF's to M&A without an MBA, so it doesn't seem totally out of the realm of possiblity.

Can you expand on this a little more? The way people talk about FoF's on here makes it seem impossible to do anything after FoF but pension/asset management without an MBA.

Jun 11, 2016

Would you mind sharing what kind of firm you're at? MM or BB?

Jun 11, 2016
Comment
Jun 11, 2016