MM Funds with Equity and Credit Strategies - Good or Bad?

Perhaps this has always been the case, but I'm starting to see more and more MM funds raising $500mm-$1bn funds with comingled equity and credit strategies, which could include regular/core control buyout, small cap control buyout, and structured capital (non-control, debt or preferred equity). Is it typical for all of these strategies to be invested out of the same fund? I get from a carry perspective it's nice to have the downside protection of credit investments, although this likely results in total carry below a traditional pure-play control buyout strategy (given lower return targets of credit investments).

It'd be great to get people's opinions on these funds and the fact that despite being MM they are juggling multiple strategies. This may not be fair, but the sense I get is it's an attempt to scale as quickly as possible (perhaps at the detriment of returns) and then branch out by raising separate funds once a track record with the main, multi-strategy fund has been established (for example, one just for control PE, another just for structured capital, etc). This has clearly worked extremely well for certain firms that started out as MM buyout firms like HIG and Platinum Equity. I just wonder if joining firms like this, recognizing they can be fast growing with lean teams potentially resulting in good upside from a career/promotion perspective, is a good long-term career move given they don't have a pure-play buyout strategy/focus and appear to be (perhaps an unfair characterization on my part) trying to juggle a bunch of strategies to see where they do well in an attempt to increase AUM as quickly as possible (i.e., founders prioritize management fees over carry).

Another potential risk is if as an example you join a firm with a $750mm multi-strategy fund that does core buyout, small cap buyout and structured capital, and you join the core buyout team, if say 50% of the fund will be deployed in core buyout, aren't you effectively joining a $375mm core buyout fund which is LMM? Said differently, firms with multi-strategy funds can appear to be fairly large, but when you realize you're working on just one strategy within the fund, I think the effective size can come down quite a bit which is then probably less attractive. You also may be competing with the other strategies to deploy capital which may mean your deal experience and reps may not be as high as a firm with a control PE only strategy.

Does anyone currently work for firms like this with multiple strategies within the same fund or have any friends who do? If so, what have your/their experiences been? Am I being overly negative?

 

Currently at a shop with distinct funds/teams between equity and credit and would be interested to see responses.  IMO co-mingling the two seems very tricky for all of the reasons you mentioned.  Plus if you want to provide sponsor financing from a co-mingled equity/credit team, you will likely run into sensitivities given your firm will be a competitor on the equity side.  I imagine these would all be concerns for your LPs as well.

 

The ones I have seen tend to be heavily distressed and are approaching opportunities with a what's most attractive place in cap structure lens. Juniors are often cross-staffed. 

It's not a buyouts vs. private credit type conflicts you get at larger managers.

Look at founders of some of these funds, tend to be distressed debt / loan to own type backgrounds.  Think Stellex / Gamut / Searchlight.

 
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Having been both equity and sole lender in the same company before, I can say that it can get very unfun. There are many situations in which the conflicting lens (growth vs downside protection) can cause confusion in the actions you take. I have no problem investing cross-capital structure, I just don't think it's wise to provide both equity and debt in the same position unless there's a very unique and unusual reason to do it (e.g. severely distressed situation where you own equity and then bought debt essentially for loan to own).

 

I imagine these firms would try to avoid being both the credit and the equity in a single deal for the reasons you mentioned.

From a quality of life perspective, could it be positive if a fund does 50% control buyout and 50% non-control structured capital as for the latter investments, since you don't have control you have less influence and there's less work involved as a result from a portfolio monitoring perspective?

 

This is accurate. Lifestyle would be better at these funds at least in my experience.

I think these type of funds are great for junior people because you can get a CIM from a banker and be creative, it doesn’t have to fit into a particular strategy. Maybe not a good fit for a buyout, at some funds you’d pass, but at this type of fund maybe you’d like to do sub debt and junior sub with warrants. On the other hand, you can still get pure buyout experience. Having flexibility across the capital structure allows you to look at a ton of deals, partner with other sponsors (thus build your network), and have some exposure to basically all the securities available to an investor.

 

To be clear lots of these funds aren't trying to be a lender and equity in the same deal. It's more so what is the most attractive / solutions oriented place to invest in the cap structure?  For example crestview does a but of this where they do full blown buyouts, debt, and structured equity / pref pieces. Being a lender and significant equity is usually bad because you run into conflict issues where you can't vote with your class.

 

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