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.
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.
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:
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.
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.
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.
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!
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.
Life is too short to be worried about what other people are doing. Putting aside where you work and the various pros and cons of that, you're doing your thing with your life and that's great - don't let just work define you and the experiences you're having in life right now or in the future. If you're not feeling content with your life, okay, figure out how to make some changes, but life is way too short to always be keeping up with the Joneses.
As for banking particularly, next time you have FOMO go read the many sad threads on the IB forum about how people are feeling overworked, underpaid, have no time for family or friends, are getting fat on a lack of exercise and too much delivery, and don't know who they are anymore. The grass is always greener and though it's easy to be jealous of friends six months out of college who are getting multiples more than you, they're sitting in their office adjusting logos on slides at 2am being jealous of you because you're just getting home from a date, had a great night out, and work for people you actually like.
Side note: If you're working somewhere that you can say "the people are really great" then you should consider yourself incredibly lucky. In my experience, that's so rare.