Q&A: PE/VC FoF Principal

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.

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.

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.

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)!

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.

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.

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.

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.

What's your thought on starting your career at a FoF compared to an endowment? Understand the work will be pretty similar, but wondering if there is anything nitty gritty that I might have missed

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.

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).

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. 

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.

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

Thanks

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  

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. 

Sent you a DM

DM’d

DM'd you

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-…

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.

DM'd

I think it would be an easy switch to any co-invest role because your skillset translates there one to one from a DD perspective. You'll have to spin more of a story on the primaries side because you don't have the experience there but I don't think it should be too hard. 

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!

Do you have any thoughts on the big LPs in the industry like Harbourvest, Hamilton Lane, Alpinvest, Adam Street etc.? Feel free to include other firms. Thanks.

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.

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.

- 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.