Q&A: PE/VC FoF Principal

I figured I would host a Q&A about the FoF and LP world to see if my experience can shed some light on WSO juniors figuring out their path since I feel like there's not a ton of insight into that side of the PE industry and most people here just focus on getting a GP job. A bit about me:

  • Ivy undergrad (majored in a social science, very little undergrad training in finance, business, econ, etc), T15 MBA
  • Lived abroad for a year after college teaching English
  • Four years pre-MBA consulting (turnaround/restructuring specialist)
  • Four years post-MBA in PE/VC primary LP commitments and co-investments, promoted six months ago to Principal
  • Active in all types of deals (early and late stage VC, growth equity, buyouts, distressed, impact/ESG, etc)

Looking forward to being helpful.

Comments (124)

  • Principal in PE - Other
1y 

It depends on the firm and how much scale there is. I do work on both (roughly a 50/50 split) and am pretty generalist though there are definitely some industries I know much better than others. At big firms where there are multiple offices around the world, people will focus just in their geography. Large investment teams can also translate to a focus just on PE or VC, specialization by industry, and/or a division between co-invest and manager selection.I greatly enjoy being a generalist and getting to work on everything. It keeps life interesting and I'm constantly learning.

Most Helpful
  • Principal in PE - Other
1y 

The flip answer is "ones that make money are good, ones that don't are bad" but I know that's not what you mean.

The framework for evaluating one shouldn't be that different from what the GP will use, understanding the company, industry, valuation, financials, etc, with a few added wrinkles:

  1. A co-investor needs to look at net returns instead of gross returns. Co-investors generally want no fee/no carry opportunities but if you're looking at an independent sponsor deal, a deal with a GP where you're not an LP and so they're charging you economics, a deal where the GP is just way off-market and charges economics on every co-investment even to their LPs, etc., you will have to consider the net return. This also means that as the co-investor you have to think about how aligned you are with the GP and if the GP is insisting on economics, how to structure a waterfall that works for both of you. As a side note, if a GP comes to me with a co-investment opportunity and I'm already an LP in the fund and they want 20% carry, they can pound sand and it's going to color my thinking about a re-up. That's just an absurd position.
  2. Is this a deal that is a good fit for the GP? If the GP does mostly buyouts and this is a minority growth investment, do I want to be a part of this? Is the company much larger than the typical one for the GP? Is it in a focus industry? What is the GP's track record doing similar types of deals? Etc.
  3. Related, why is the GP showing me this deal? Are they being a good partner to the LP here or just trying to offload some risk? Is it "portfolio construction reasons"? Something else?

This isn't an all-encompassing list but at least it's some of the things that would be top of mind in addition to standard DD items.

  • Principal in PE - Other
1y 

This one is really tough as it's one of the biggest risk/return spreads because especially in venture you can get huge outperformance from emerging managers…. But also many more that are fourth quartile. That said, I've never had a specific emerging manager mandate so have backed almost no first-time funds. It's the kind of thing that, if you get it wrong, the client fires you and if you don't do it, nobody gets angry that you didn't take a shot. Most first-time funds have less institutional backing (more HNWI and family offices). When a first time fund does have institutional backers, I take notice. Some institutions have dedicated emerging manager programs so that they can get in on the ground floor of the next great GP but also spread their bets around - basically like a seed fund.

If I am underwriting one, I still try to understand track record as best as possible. Ideally (though rarely), the GP has attribution from his/her previous firm. If not, I'll try to triangulate track record, especially if I know the previous firm and have that data. References are really important as is understanding why this new firm needs to and should exist. Is there any sort of sourcing or value-add advantage that this new GP brings to the table that will help it win deals or drive returns? There are plenty of new funds out there that don't seem like they have any particular angle other than it's some folks who felt like they'd make more money on their own than under the umbrella of their old firm. If you have no differentiation, you better have the most amazing track record and a solid way to back that up…. and even then it's tough since Fund Is usually have a lot of kinks to work out.

1y 
NuclearPenguins, what's your opinion? Comment below:

When you say rarely there's attribution - are you talking about "official" attribution only? In my experience "unofficial" attribution was pretty much always available, and then gut checked based on how well they actually could talk to the deals, validating w/ reference calls if possible.

1y 
ToMark, what's your opinion? Comment below:

How do you get around new key persons being more cagey with their historical track records prior to the first time fund? Is it mainly through triangulation using other data points? 

1y 
superslav, what's your opinion? Comment below:

Appreciate you taking the time to do this! Was wondering how work/life balance is viewed in your group? Are weekends generally off considering the timelines of the investment processes (especially drawn out primary investments)? Would also love to know the extent that you travel

  • Principal in PE - Other
1y 

WLB is a sliding scale that depends mostly on how much co-invest the team does as those timelines can be very fast and getting faster (pre-Covid the average was probably six weeks, now it's more like three to four). That can have you working PE-lite hours (probably 8-8 on slower days, 8-midnight or later when you have a deal that's sprinting) without making PE money. Rarely is there weekend work. If you're doing mostly primaries, you might only be working like 50-hour weeks and definitely not opening your laptop on weekends. The upside to more co-invest is that you probably get carry at some point.

As for travel, I haven't traveled at all since Covid started and don't know how that will look as we emerge from the pandemic. Before, there was a decent amount of travel during annual meeting season (spring and fall) but that means mostly NYC and SF with a little bit of Boston and other places so depending on where you are, it might mean almost no travel. Juniors on my team rarely travel, maybe 1-2 days per year.

1y 
superslav, what's your opinion? Comment below:

Thank you! What has your comp progression looked like and do individuals in your group have access to carry?

  • Associate 3 in PE - Other
1y 

thanks for the answer!

On the point of comp; do you feel you're being compensated properly for the hours you're pulling (especially if we were to assume you were running at one / two co-inv per month).

Thanks

  • Analyst 2 in AM - FI
1y 

Appreciate the willingness to do this. A couple questions:

What made you leave the turnaround/restructuring world?

What's one thing you know about that space now that you wish you knew when you started? (Alternatively, what are some secrets about that space that you've learned and think other people should know)

Lastly, I am currently working as an analyst (hopefully associate next year) at a FoF (not the top manager but a notable name) covering a specific private markets strategy (we don't do coinvestments atm but will in the future). Without going into specifics, I want to quit when I feel ready and try my hand at some direct investing at a small scale (small to lmm size range, access to capital not a barrier). If I go this route and end of either failing or not wanting to pursue it further, what are the chances that I can get back in the FoF game? Certainly having GP/ direct investing experience can make a candidate attractive , but not really at the small scale I would imagine. Would there be a path back (notwithstanding relationships built at my current firm) or would I be out of luck?

  • Principal in PE - Other
1y 

What made you leave the turnaround/restructuring world? Consulting is a lot of fun in your 20s. You get to travel a lot, see lots of businesses, rack up a ton of hotel/airline points, etc. and most people have no responsibilities to anybody other than themself. That calculation changes. I looked at the director/MD level of people and everyone just seemed miserable. Family life sucked. People were getting divorced left and right or were married to absolute saints. If I had a nickel for every time I was driving a rental car to a team dinner while the director facetimed his kids for three minutes before they went to bed, I wouldn't need carry. 

What's one thing you know about that space now that you wish you knew when you started? (Alternatively, what are some secrets about that space that you've learned and think other people should know) About turnaround and restructuring? There are a lot of people in that industry who really lean into the vibe. One of my first projects, the MD turned to me, handed me a list of bills that the company had racked up, and said "Ever called up a creditor and told them to go fuck themselves? No? Well today's your lucky day!"

Lastly, I am currently working as an analyst (hopefully associate next year) at a FoF (not the top manager but a notable name) covering a specific private markets strategy (we don't do coinvestments atm but will in the future). Without going into specifics, I want to quit when I feel ready and try my hand at some direct investing at a small scale (small to lmm size range, access to capital not a barrier). If I go this route and end of either failing or not wanting to pursue it further, what are the chances that I can get back in the FoF game? Certainly having GP/ direct investing experience can make a candidate attractive , but not really at the small scale I would imagine. Would there be a path back (notwithstanding relationships built at my current firm) or would I be out of luck? I think most FoF would welcome you back to the industry with open arms, particularly if you wanted to be doing co-invest. People value the deal execution skillset and love to get somebody who worked as a GP on the team. You might have to tell a bit of a story about why you went to do some small-scale directs for a while and you would be less competitive than people with a brand-name GP on their resume but you'd still be more attractive than an MBA with only sort of applicable experience (like me coming out of business school)!

  • VP in PE - Growth
1y 

Curious about the framework you have for evaluating the re-up for a first-time fund (so emerging manager, but second fund) in early-stage Series A-B VC (not seed-stage) right now. The TVPI and #s in the market are absolutely crazy so benchmarks are very high. 

Should be the easiest time to raise a decent performing venture fund, but I'm not sure if that is for the largest funds and less so for the emerging players (150-400M fund size)? 

  • Principal in PE - Other
1y 

There's as much art as science here for exactly the reason you bring up. It seems like everyone and their mother has a VC fund right now that's marked up quite a bit and in only a couple years.

The science part is the benchmarking; yes, benchmarks are very high right now but that means if you aren't performing well relative to others, I want to know why. Even if you are "top quartile" but everything is unrealized because you're only a couple years in (probably still in your investment period, even if your fund is fully committed/reserved), I'll want to understand who led follow-on rounds in your portfolio companies (are you being marked up by good GPs or people I've never heard of? Or worse... are you leading your own follow-on rounds and so you're giving yourself your own markups?) and also the velocity of the portfolio companies (KPIs like revenue growth, EBITDA if any, etc).

The art part is things like, does it feel like the GP is doing what they said they'd do? Is there strategy drift? Are they raising a similar size fund or a much bigger fund? Are they also raising a growth/opportunity vehicle in tandem with their early-stage vehicle? Does the team have the bandwidth to support the portfolio? Is the team big enough? Is the team incentivized properly? Etc etc.

1y 
Teller in Branch - Personal Loans, what's your opinion? Comment below:

What type of formal training would you recommend for training new associates for fund investing? ILPA appears to have interesting modules but not accessible by by all types of funds. Anything else come to mind? Thanks in advance.

VP
  • 3
  • Principal in PE - Other
1y 

I hate the phrase "it's an apprenticeship business" but I'm not sure there's a better approach (and if somebody else has a better answer here, I'm all ears). There are business school cases and similar materials that can teach people the more quantitative part of benchmarking, track record analysis, etc. (or even the most basic stuff like "what is TVPI, IRR, DPI, etc") and can touch on some of the human elements around alignment of incentives, building of teams, etc. but I think there's a lot of pattern recognition that goes into seeing the lives of funds over time and understanding what models work and what don't. 

For the basic stuff for new associates, any MBA program that is case-based should have some decent PE 101 materials that talk about how to evaluate a GP. Or you can just roll out an investment memo or two of your own and talk through the key points.

1y 
Sirmonkey92, what's your opinion? Comment below:

Thanks for doing this.

How many juniors do you have on your team. What are their backgrounds? Did you find them through recruiting or they apply online? What is the interview process like?

  • Principal in PE - Other
1y 

My first firm had probably 15-20 juniors, my current firm has two. Most are hired out of undergrad via a hybrid recruiting/online process. Interviews are mostly behavioral with a couple light technicals thrown in along the lines of "if I were doing a buyout of this company, what are some things I should consider in diligence" more to test critical thinking skills than anything else. Usually it's a couple rounds, phone screen and then super day. We'll teach you how to build an LBO model for a co-investment or analyze a GP's track record for an LP commitment - can't expect anybody fresh out of undergrad to know that stuff so there isn't a modeling test, though I do like giving people case studies since you can still test critical thinking and writing skills. I'm always amazed at how really smart undergrads from top universities can't write to save their lives... particularly those coming out of business or finance programs. Even if you think you're going to be an Excel monkey for the first few years of your career, you're going to do plenty of writing also!

We've hired some laterals and it's obviously nice because they tend to come from IB analyst programs and so they're more turnkey on technicals. We do ask laterals to take a modeling test in addition to interviews. Turnover tends to be higher with them and I've found over the years that the laterals we're getting were ones who just didn't have success in GP recruiting the first time around so they came to us, got a little investment experience, and re-recruited since they'd taken a pay cut to leave banking and wanted to chase PE money. It's been easier to retain homegrown talent, though ultimately many of the do end up moving to GPs.

1y 
Sirmonkey92, what's your opinion? Comment below:

Thanks for the quick response. if I could follow up.

What if you dont have a IB background? Do you still interview candidates with a few years of non-ib/FO experience. Any advice for someone in this position.

  • Principal in PE - Other
1y 

For sure. I'd work for one in a heartbeat. Having just one client (the organization you work for) instead of juggling the portfolios and needs of many clients would be great. If I could find one in the right geography, I'd be happy to do it. The only problem I have working specifically for a college endowment is that I then might have to move to a college town and while I like visiting them, I'm not ready to move to one just yet.

  • Principal in PE - Other
1y 

To the Associate's point, it's really about where you'll get the best training and what you think you want to do as a next step in your career. If you want to do a lot of co-invest and ultimately get a role with a GP, you're probably better off at a fund of funds, and a larger one at that where there will be an analyst program. If you want to be on the LP side, there are plenty of good FoF that will give you the training but some of the top tier asset owners can be great places as well - think Texas Teachers or the Yale Investment Office. The big consultants can also be solid starting places - Cambridge Associates, for example, might not be a long term fit for a person but it will be a great first line on your resume and people in the industry will know that you've gotten a good training pedigree after a couple years.

1y 
acardboardmonkey, what's your opinion? Comment below:

I come from a direct background (VC / growth equity) and have been chatting with people about the space for some time as a lateral. The appealing features to me are the ability to chat with smart PMs and the lifestyle. With that being said, I was curious what you felt are the downsides with FoF work? (Aside from comp - I honestly care more about enjoying the role I am in).

  • Principal in PE - Other
1y 

Well the biggest downside is comp - you're not going to make nearly as much as you do at a GP.

I think the other downside, particularly if you're coming from a direct shop, is that you don't get nearly as close to the companies you invest in when doing co-invest. You won't be involved in value creation at all and you'll generally just be getting quarterly updates on progress. In rare cases you'll have a board seat, maybe a board observer seat, generally just information rights. This means you have to really like just looking at lots of deals, because a lot of co-invest means a lot of churn on doing deals. 

The flip side of being an LP (whether FoF or E&F, pension, etc) is pretty much what you observed: the WLB is much better and you get a really great bird's eye view of the whole industry. I learn so much talking to GPs and hearing what their strategies are, understanding how people are searching for an edge in an increasingly crowded and competitive space, and seeing where the whole industry is going. Most GPs don't really have a sense of what's happening in PE/VC writ large, they just know the spaces they're deploying capital into.

1y 
acardboardmonkey, what's your opinion? Comment below:

Thanks so much! That's really helpful. My follow up is do you feel you're missing out on the deals? I still feel that what you described is appealing to me, but I am concerned on what you mentioned about hearing about all these great deals and not being able to execute. My counter point to myself is that high-level jobs on the direct side end up being like this anyway

  • Associate 3 in PE - Other
1y 

Can you tell me, if this is a normal level of analysis to do for FoF - i) review every (priority) fund annually, in detail - have a view on nearly every company in some detail on the fund invested in (can take anywhere from 2-4 full days), track these quarterly as well and re-fresh the work (update numbers / views) if there is a new fund (can take another few days).  This will usually mean trying to assess whether behind plan, recent performance, investment alignment with strategy, and trajectory of company (and then the fund as a whole). This can mean reviewing 20 companies per fund etc. As part of a new / existing fund review process, do you do this highly granular type of work? Or know of any FoF manager that does?

  • 1
  • Principal in PE - Other
1y 

Review every fund annually, yes. Have a view on every company in every fund (or even just the top funds) that you're an LP in? No, and certainly not to the degree that I'm tracking them on a quarterly basis or assessing with that frequency where they stand with regards to plan. That feels to me to be too in the weeds and something you can only accomplish if you have a small portfolio and a large-ish team, or a really robust data collection and analysis platform. It does, however, makes sense to have a good familiarity with the value drivers in each fund and discuss those as part of an annual update, then really dig in further when it comes time for a re-up decision (which at this point is happening pretty much every other year for a lot of funds).

  • Associate 3 in PE - Other
1y 

Thanks for the prompt and detailed reply! Valuable.

Would you think it makes sense to be that granular per AGM / quarter even if you are managing a smallish portfolio (say 5 funds)? I wonder if this is valuable to any decision at all; i.e. assuming one / two companies are a material drag on the fund, you can't do anything other than maybe sell your position (unlikely), but rather not re-up - so you might as well just wait until then? 

And then separately, as part of a new GP investment - do you think this review makes sense all PortCo companies (in all previous funds - can be anywhere between 10-30 comps say), and like I said, take between 2-5 full days? And if not, why would you not think it makes sense?

1y 
drypowder123, what's your opinion? Comment below:

Curious to hear your thoughts on Specialist versus Generalist strategies particularly in PE. Inclined to think specialist strategies (sector, structure, etc) are more likely to outperform but was curious why LPs/FoFs still commit capital to more generalist MM funds with how competitive the market is. Thanks for doing this!

  • 1
  • Principal in PE - Other
1y 

This is a great question and one I don't have a good answer for. I'm not 100% sure this is an accurate assessment though; look at Vista and Thoma in software or Veritas in government services for example; they're specialists who have been around for a long time and LPs love them. I suspect that the phenomenon you're observing is actually because, in many cases, most specialist funds, particularly in the MM, are newer, LPs have a limited number of commitments they'll make every year, and they are going to stick with the GPs they know and have partnered with for a long time barring actually bad performance. If you've been an LP for a few funds, it really takes a lot to not re-up because your IC tends to be not want to second guess itself and knows that if you don't re-up, you'll probably never get back in, so even some third quartile performance can get excused here and there - obviously not consistently, but some. 

However, if we accept your premise as just 100% true, the other factor that may be at play are that LPs would rather have GPs do the diversification rather than trying to construct a portfolio consisting only of the best health care GP, the best tech GP, etc. Particularly if the LP has a very lean investment team, it cam be more difficult and time-intensive to do this than to go commit to a basket of mostly solid generalists with perhaps a couple specialists added in. 

11mo 
afsfasf, what's your opinion? Comment below:

Would you mind DM me? Thanks!

Array

1y 
PC2020, what's your opinion? Comment below:

Would appreciate your views on backing independent sponsors and the economics that would be market standard in terms of management fees and carry

  • Principal in PE - Other
1y 

I don't have a philosophical problem with it in general but it's really important to get your interests aligned. Every independent sponsor I've ever met has just proposed 2/20 and I hate this (even with a hurdle rate) because then the sponsor has no incentive to work particularly hard on this deal - their incentive is to go find more deals to raise capital for and charge 2/20 on all of them also. I like a tiered waterfall where 10% carry up to a certain MOIC/IRR target, then 20%, then the possibility of 25% to give the sponsor some upside. It's all negotiable of course but unless it seemed like the greatest deal under the sun, I wouldn't ever do a straight 2/20 independent sponsor deal. 

As for backing them, I'm going to do as much DD on the sponsor as on the deal, with the process looking very similar to how I'd underwrite any LP commitment to a GP.

  • Investment Analyst in Consulting
1y 

Just posted a separate discussion topic on this, but:

Do you think someone doing Manager Research/Selection at a Cambridge Associates-type firm has a chance to get in at the associate level with 3 years of experience?

  • I'm also considering Megafund IR -> FoF Analyst or Megafund IR -> MBA -> FoF Associate as well, but I'm more skeptical of those paths working out without getting a top MBA / doing the CFA / lateraling into banking or a FO first maybe.
  • Associate 3 in PE - Other
1y 

Hi mate; sorry off-topic; do you know comp ranges for megafund IR at asso / senior asso?

Thanks

  • Investment Analyst in Consulting
1y 

Sr Analyst (2yrs) ~200kish all in, Associate (3+ yrs) ~230-260k all in or maybe more depending on your background (IBankers can start as Associates, for example, and get promoted way faster IMO).

It's far far more money than smaller funds' IR roles pay at all levels, because those roles are really really based more on how much you bring in, while MF IR is about onboarding the marginal client. 

1y 
captainhindsight95, what's your opinion? Comment below:

Hi man,

I'm in a similar situation to you - a couple of years in as an investment consultant on the primaries side wanting to underwrite commitments - can you DM me? Would be great to hear your thoughts  

  • Principal in PE - Other
1y 

Sure, definitely possible though I don't think doing an IR role will help you at all - it might even hurt if you want to be on an investment team doing coinvest. If you want to keep doing mostly primaries then I don't think you need anything else to leave Cambridge. Otherwise, you'll need to find a way to build your modeling chops and prove that you have them to others. MBA is certainly a good way to aid with that transition, banking would definitely get you there, possibly CFA or a Training the Street / Wall Street Prep type thing.

  • Investment Analyst in Consulting
1y 

Thanks for the thoughts, and they mirror mine. Essentially, I'd take the gig for the name (Carlyle, BX) and the exposure, but I'm not sure it'd be all that helpful. It would be a technical Biz Dev gig, understanding the other side of the LP-GP relationship and doing the modeling to get client IRRs/MOICs/DPIs, etc--good usage of SUMIFS and such with good pay. Can see myself being able to spin it, especially at a FoF with 25% or less co-investment work, but such gigs seem few and far between. 

  • 1
1y 
Senior Associate, what's your opinion? Comment below:

Can I DM you for questions?

I went to Ross UG. Working at McK for 6 years now (EM currently). Going to Booth MBA next year, hoping to make a switch to PE.

1y 
dafuq, what's your opinion? Comment below:

What is MD comp like?

  • Teller in Non-profit
1y 

Poop

1y 
IMissTB12, what's your opinion? Comment below:

OP - is it possible/have you seen folks go from a placement agent (primaries only) to a FoF role focused on primary fund investments? Would love to bounce a few ideas off you. 

  • Intern in IB - Gen
1y 

Thanks for the thread. Did IB last summer but moving to a FoF this summer. Would you mind sharing tips & tricks to do well during my internship (skills to brush up on, etc.)? 

  • Principal in PE - Other
1y 

I don't have better info on comp across the industry than what is already available on this site, and you can easily look that up (search for Hamilton Lane, Harbourvest, and Stepstone to get an idea of what the big boys pay). There's also a thread going on here: https://www.wallstreetoasis.com/forum/asset-management/how-much-do-you-make-endowment-foundation-fof-pension-edition

As for your internship, I'd say a few things:

  1. Do whatever anybody asks you to do, volunteer for stuff if people are looking for volunteers, and do it all in a timely fashion
  2. Re-read everything you write before sending it to anybody who works there full time. You don't want to be doing a lot of rework and you don't want to build a reputation as somebody whose every word needs to be carefully read before it goes in front of the IC because you don't proofread
  3. Develop your own view of any manager or co-invest that you are doing DD on and be ready to support your view with details, particularly hard data (whether industry/macro or company-specific)
  4. Be a good team player, work well with others, be a generally nice person, etc.
  • Intern in IB - Gen
1y 

Very helpful advice, thanks. 

1y 
TP971011, what's your opinion? Comment below:

Mind if I DM you? Looking to learn more about this space and would love any tips. 

11mo 
Mezz_Star, what's your opinion? Comment below:

Curious what your thoughts are regarding an experienced direct investor at a GP looking to make a switch to the LP/GP world. Simply put, I enjoy evaluating investment opportunities, but I would rather evaluate primaries and co-invests for both intellectual and lifestyle reasons. I have a lengthy deal sheet of directs, but I am not sure how this experience would be viewed in the context moving up the "capital chain" as I like to say. FWIW I think I can spin a good story.  

11mo 
peguk933, what's your opinion? Comment below:

Hi,

I am wondering if your insight into PE and through your journey you could advise me on a potential path.

I have recently just graduated from a top engineering university and look to embark down the private equity path – hoping to potentially look at the fintech sector. I am looking to study a masters in finance and then planned afterwards to become a strategy consultant with one of the big four. From here I was then looking to work for 4-5 years and then try and make the jump into private equity. Is this an advisable career path or is there a smoother route to take as opposed from jumping from consulting to PE. I am hoping to use this masters in finance to really work out which path would suit me best – however as part of my statement I need to clearly state my career goals and have a path inline with these as opposed to sounding this confused and jumping from one career to the other. If I did not take this strategy consulting route, what would you recommend or if you have any thoughts on this I would love to hear them

  • Principal in PE - Other
11mo 

This feels like a doable route though it definitely won't be easy. You'll need to hustle a lot to pull off the consulting -> PE part of it, especially if you don't do MBB. That said, it sounds like you want some time to figure out what you really want to do and consulting is great for that. You might even learn that you want to do something other than PE!

  • Associate 3 in PE - Other
11mo 

Hi - I have some questions on private credit secondaries - can I PM?

Thank you!

10mo 
D3soccerguy, what's your opinion? Comment below:

Hey I was wondering more about your DD/thought process when it comes to making a primary fund investment? Is there any underwriting of expected returns or is it more historical research on previous fund, going through marketing materials, and interviews/meeting the GP?

I've been on the GP side so I understand how a co-invest would work but am curious about the fund investment side, thanks!

  • Principal in PE - Other
10mo 

Is there anything specific you want to know about them? I think they're all pretty smart. Seeing them as LPs in a GP is an indicator that a fund is institutional quality but there's not much more that I conclude beyond that, since they all have plenty of clients, different funds, etc. and so you never really know why they're an LP without doing a reference call with somebody who works there and understanding how they think about a GP.

  • Principal in PE - Other
10mo 

You can't exactly underwrite expected returns but there are a number of things to think about that can help gain comfort that past performance may in fact be indicative of future returns. If a GP has strong historical returns, I want to understand first whether there's anything that's going to be different about the new fund. For example, has the strategy shifted? Has the team stayed the same? Does it seem like there really is a flywheel of deals? 

Also, what does the value creation process look like? Has the GP just gotten lucky and benefitted from a hot market and multiple expansion or is there something it's actually doing to make companies more valuable? Part of this goes back to strategy, since you could be doing turnaround and making money on the buy, or a LMM roll-up strategy and earning your multiple expansion by building a much larger platform. Is there significant top or bottom line growth for portfolio companies and how do individual case studies match up with what the GP says its strategy is? Where there have been bad outcomes, why didn't the investments work out and how has the process changed to avoid a similar outcome in the future?

When it comes to team, there are several things I'm interested in, including how close to retirement leadership is, how instrumental they are to getting deals done versus the next layer of partners, whether there's a deep bench of talent, whether the GP has been able to retain talent over the years, and how everyone is incentivized. Is there a succession plan in place if leadership is close to retirement age? What happens if somebody gets hit by a bus or has a heart attack at an unexpectedly young age? Who are the key people in the LPA and is there risk beyond who's defined as a key person?

All of the steps you mention in your question are important, though I'd also add that reference calls with portfolio companies can be very enlightening. Even when they say nothing but glowing things about the GP, they can still shed valuable color on how a GP operates, who's actually doing the work, and what a GP's value add really is.

10mo 
007en, what's your opinion? Comment below:

I have a Case Study Interview with FoF that does Primary and Secondary. Apparently, I discuss it through with the PM in an informal chat. What sort of things should I expect? My background is mostly debt so I am not too sure. 

What would be some good answers for - "if I were doing a buyout of this company, what are some things I should consider in diligence for co-investment?" My take would be valuation, appropriate leverage, impacts on management, viability of value add and exit strategy

On a side note, do you have any regrets about choosing the LP life over GP life? Being young in my career I am not too sure if I will regret not trying GP role. My main motivation for being in LP is a lifestyle and having opportunities to analyse a broad range of investments across different industries

Regards, 007
  • 1
  • Principal in PE - Other
10mo 

The framework for evaluating one shouldn't be that different from what the GP will use, understanding the company, industry, valuation, financials, etc, with a few added wrinkles:

  1. A co-investor needs to look at net returns instead of gross returns. Co-investors generally want no fee/no carry opportunities but if you're looking at an independent sponsor deal, a deal with a GP where you're not an LP and so they're charging you economics, a deal where the GP is just way off-market and charges economics on every co-investment even to their LPs, etc., you will have to consider the net return. This also means that as the co-investor you have to think about how aligned you are with the GP and if the GP is insisting on economics, how to structure a waterfall that works for both of you. As a side note, if a GP comes to me with a co-investment opportunity and I'm already an LP in the fund and they want 20% carry, they can pound sand and it's going to color my thinking about a re-up. That's just an absurd position.
  2. Is this a deal that is a good fit for the GP? If the GP does mostly buyouts and this is a minority growth investment, do I want to be a part of this? Is the company much larger than the typical one for the GP? Is it in a focus industry? What is the GP's track record doing similar types of deals? Etc.
  3. Related, why is the GP showing me this deal? Are they being a good partner to the LP here or just trying to offload some risk? Is it "portfolio construction reasons"? Something else?

This isn't an all-encompassing list but at least it's some of the things that would be top of mind in addition to standard DD items.

To your second question, I have no regrets about choosing LP over GP. It's a better lifestyle and the pay is decent. You won't get rich beyond your wildest dreams but you'll be able to live a comfortable life and actually enjoy it. But if you're worried that you might regret it later, try being a GP first. You can make the move to the LP side afterwards.

10mo 
007en, what's your opinion? Comment below:

Thank you very much for your help and advice! The case ended up being more consulting type. I am having my final interview next week with the PM. Fingers crossed. 

Regards, 007
  • Prospect in VC
10mo 

Hi there,
I worked in several VC funds but only as in intern. I learnt a lot and love this space, and thought my first full-time job would be at a fund. But then I got another offer from a good asset investment firm doing VC/growth fund and co-investments. I decided to go for them instead. Now I still ask myself a few questions:
- Would it be seen as a "downside" for VC funds' recruiting to come from an LP background?
- How easy is it to move from VC/growth co-invest to PE co-invest? 
- How different is the DD (financial & commercial) from an LP and GP side?
- What makes for you a good investor as an LP?
- In general, what would you say are the exits opportunities from a VC/growth fund+co-invest asset manager?
Thank you!!
 

  • 1
  • Principal in PE - Other
10mo 

- Would it be seen as a "downside" for VC funds' recruiting to come from an LP background? 

I'm not sure I understand the question. VCs probably won't be as interested in you if have an LP background unless you can prove to them why you can provide differentiated sourcing and really understand start-up world. LPs are usually a mile wide and an inch deep. VCs want somebody who can look at 100 companies all solving basically the same problem and figure out which one will be the best five years from now.
- How easy is it to move from VC/growth co-invest to PE co-invest? 

Can you build an LBO model? Are the growth deals you're looking at decently mature companies or is it basically just later stage VC? It'll be about the story you can tell and what your track record looks like.
- How different is the DD (financial & commercial) from an LP and GP side?

GPs (particularly PE), go very deep into a company. The large GPs will also employ a lot of consultants to do various aspects of DD. A GP might spend months in DD. An LP gets somewhere between a week and a couple months to get the work done, so LPs are really just trying to validate that what the GP is telling them about a deal is true and that the LP agrees with the GP's assessment. For example, the GP is the one setting the price of the deal and the LP gets no say in it, but it's up to the LP to decide whether they think the valuation is actually reasonable or not. The GP will typically give the LP all of the work that they've done (a version of the financial model, investment memo, consultant reports, etc.) to get started, so the LP's DD budget is much lighter. 
- What makes for you a good investor as an LP?

Have the same good investment instincts as you would need as a GP, be able to move very quickly on co-investments, develop a sense for when a GP is showing you a good deal because they value your partnership versus when they're trying to offload risk onto you because they think you're dumb money.
- In general, what would you say are the exits opportunities from a VC/growth fund+co-invest asset manager?

The easiest exit is to another LP. If you're lucky and do a lot of networking, you might be able to engineer an exit to a GP but it will be either an emerging manager or a GP that hasn't had great performance in the past. You could also probably move to an IR role since you understand how LPs think.

10mo 
drippydrippy, what's your opinion? Comment below:

Are there any questions you ask or attributes you look for when thinking about emerging managers (that don't spin out of top funds)? Any red flags? Do you think pedigree matters?

  • Principal in PE - Other
10mo 

Here is David Swensen's take: https://www.linkedin.com/posts/marcelinopantoja_david-swensen-on-fund-managers-with-no-track-activity-6916578837036216320-qWBj/

Of course, if you're managing client capital instead of your own, that's a pretty risky strategy to pursue since clients will ask "Wait, you're putting my money with who??" In which case, pedigree certainly matters. Even if they don't have an attributable track record, being able to sleuth out what their track record might be (assuming you know their previous firm) is obviously helpful. Equally as important is understanding the investment thesis and why this new manager is going to be differentiated in the market, where there are seemingly hundreds of Fund I and IIs getting raised every year. How will they win deals? How will they find opportunities others aren't? If I only have enough money to make a commitment to one new sponsor this year, why is this the one that should beat out all the others who are raising capital right now? Or why should it take money away from an existing manager?

8mo 
mlz0408, what's your opinion? Comment below:

Hello, thank you for all your time to answer questions regarding secondaries. I have a case study in a shop next week and I have been looking at the models used, specially an example Pomona gave in a CFA workshop. I see that they have various metrics that I am not sure what they mean. For each company in the fund they have Cost, NAV (then NAV/Cost as a multiple) and then adjusted NAV at record date. What could potentially be the difference between Cost and Adj Nav? Is cost the discount/ premium paid and adjusted NAV the actual NAV at closing using market valuations and multiple? Would be great if I can get any insights on this. Thanks!! 

  • 1
  • Principal in PE - Other
8mo 

I don't think it's likely that PE firms try to disintermediate iCapital because iCapital clients are generally too small for many PE firms to care about on an individual basis. They only make sense as larger, aggregated checks. Where I would think there will be more competition is between iCapital and the private wealth managers or Hamilton Lanes of the world, but I don't 100% understand iCapital's competitive positioning or value proposition versus them so I could be wrong here.

7mo 
Wu-Tang-Financial, what's your opinion? Comment below:

Do you have any insight to average hours worked for insurance companies and state pension funds that operate in a similar capacity (with or without co-investment as a strategy)?

Also, thoughts on middle market private debt managers (think Golub, Owl Rock, etc.) as an adjacency to PE / VC asset class and have you looked at any of these opportunities? 

  • Principal in PE - Other
7mo 

If you already have the offer? Live your life and have some fun before you hit the desk. You have the rest of your life to work so enjoy yourself while you can.

If you're trying to get hired in that role? Demonstrate that you understand what the role is (see the 100+ posts above) and what about your background and experience will make you good at that. Have some thoughts on what's happening in markets and what that might mean for the types of funds you would be looking at. I can't see an entry-level candidate ever being asked to pitch a fund or for their thoughts on a specific fund in an interview process because nobody expects you to know that yet so if there's a way for you to do that, it could help you stand out from the crowd of otherwise smart, motivated people who also read the WSJ and Litquidity.

6mo 
marjoe, what's your opinion? Comment below:

Could I pm you? I have an offer to intern at an FoF and want to share some of my thoughts/get some input on the offer.

3mo 
The Stranger, what's your opinion? Comment below:

For let's say emerging managers (Fund II - III), how, if at all has your underwriting criteria (performance expectations, more/less bias toward concentrated/thematic investors, sectors or asset classes) flexed given the macro shift? Most interested in venture but really fascinated in PE as well. I'll owe you a beer, thanks for doing this!

Life's is a tale told by an idiot, full of sound and fury, signifying nothing.
  • 1
  • Principal in PE - Other
3mo 

I wouldn't say my underwriting criteria has really flexed - if you're a disciplined allocator, there shouldn't be too much shift. That said, there are plenty of people out there who haven't been disciplined over the last few years and that's going to make it tough for emerging managers, particularly in VC, to raise their next fund in the next 12-24 months. Many institutional investors are going to be doing almost no new managers and will be trying to limit their privates commitments as long as public markets stay depressed while private valuations hold flat because from a asset allocation perspective it makes them look way overallocated to PE and VC. FoF world might be a little different because we aren't necessarily managing a multi-asset portfolio, we're generally just thinking about privates, but the end client is certainly thinking about their overall portfolio and liquidity needs.

From my perspective, the Fund II-III crowd that has fundraising success over the next year or two will need to show that they didn't just throw money at deals left and right during the height of 2021 and that they knew better than to pay 100x ARR for companies with questionable business models. This is on top of the usual things that any manager getting a first-time commitment would need to prove (essentially, what's their edge over the hundreds of other VCs out there).

2mo 
Wags_Wagner, what's your opinion? Comment below:

What are some of the best LP critiques you have heard from GPs?

Self-reflection question :)

"well thank god your feelings aren't a fucking priority here"
  • Principal in PE - Other
2mo 

This is a tough one because I don't think I've ever heard a critique of LPs from a GP... don't bite the hand that feeds you and all that. 

But if I were to guess at what LP behavior annoys GPs, here are a few things off the top of my head:

  • Taking forever to make decisions
  • Not giving honest feedback about why they're passing on a fund (and if it's early in a process, might just ghost rather than provide any feedback at all)
  • LPs who say they want to do co-invest and then never actually pull the trigger on a deal but take up a lot of GP time in DD on co-invest deals
  • Using an inordinate amount of GP time during DD on a fund but then only writing a small check
2mo 
Wags_Wagner, what's your opinion? Comment below:

Very interesting. From the GP side, I can confirm there are a lot of critiques. And as a part of scaling up several funds, I can attest that we dump bad LPs as soon as we can.

Those are all common and you are particularly accurate on the coinvest points but the most telling is actually the first comment about "don't bite the hands that feed". That's a classic GP vs. LP perspective diversion. GPs view many LPs as unnecessary middlemen, delivering no real value-add to their clients while soaking up fees. LPs aren't investors or operators, they just deliver commodity capital. The only way many LPs even try to create value is trying to wrangle lower fees from the GP. In the GP mind, "look at my returns and write the check or don't but don't waste my time".

Or at least that's an not uncommon stereotype. In fairness, there are good LP partners who realize what they don't know and when they need to trust the GP or if not just F- off and they are very helpful :)

And I'm sure there are just as many or more Sh-- and/or shady GPs who just pile AUM to eat fees or do other shenanigans that give LPs at least as many grievances :)

"well thank god your feelings aren't a fucking priority here"
  • 2
  • Associate 3 in PE - Other
2mo 

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  • Principal in PE - Other
2mo 

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  • Analyst 1 in PE - Other
1mo 

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  • Principal in PE - Other
1mo 

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  • Analyst 1 in PE - Other
1mo 

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