Q&A: Private Equity Fund of funds - GP Evaluation/ Due diligence

To give you a bit of background, I work at a Global Private Equity Fund of Fund as a Senior Associate. 6 years of experience, Chartered Financial Analyst. Work primarily involves GP Sourcing +Evaluation, Due Diligence, and Portfolio Monitoring. I evaluate GPs across the spectrum - Growth/ Buyouts/ Co-investments/ Secondaries/ Venture Capital across US/ Europe and Asia.

I'm happy to answer questions related to
- The functioning of a PE FoF work
- FoF Interview Preps
- GP Evaluation
- Portfolio Monitoring

p.s - if your Fund is raising capital, feel free to DM me for a chat!

WSO Mentor

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Comments (28)

 
  • Analyst 3+ in IB - Ind
Jul 6, 2020 - 2:27pm

Thank you

1) why did you choose to work in PE FoF?
2) how do you source GPs? Do you have to actively source or do they come to you?
3) do you ever engage with fund placement agents? What's your view on these agents and do you think fund placement is a dying area or growing area becoming more important to PE/GPs for raising capital?
4) what do you actually do when evaluating GPs?
5) what does the due diligence entail? Examples would be helpful
6) could you run me through the process of how a typical deal works?

Thanks again

 
Jul 7, 2020 - 3:45am
  1. This can be an extremely long answer. I'll keep it short - the opportunity for exposure, meet and work with brilliant minds, put my analytical and logical skills to right use, $ increment from a Big4 role.
  2. Over the years, the team members (10+ years each) have built solid connections in the industry. Networking events (eg. SuperReturn)+ leveraging our personal connects to stay in touch with these GPs. We also use databases (eg. Preqin, PitchBook, CapitalIQ) to find the funds in the market, do some benchmarking in terms of historical returns and then reach out to them when we are looking to commit to a typical strategy.
  3. Placement Agents play a rather big role in this space. We are conscious of the fact that we may or may not know every single GP in this world. Over the years we've realized that few placement agents take very high-quality mandates and they are always good to look at. PAs are to FoFs what IBs are to PE/VCs - will always be critical to this industry.
  4. +5+6- start with the GPs pitch decks, then calls with the teams, if we like the team and their strategy fit then we do a face to face meeting (unfortunately pre-COVID only). We keep a database of who all we've met/ our comments/ reasons to accept or pass. Start conducting intensive benchmarking with other similar funds in the industry/geography. Conduct reference checks on a few select GPs and independently rate them based on our proprietary ranking model. Select the top GP from this (always end up having heated debates within the team ;) ). Agree to commit to a particular fund. Start preparing investment memo. Conduct more detailed reference checks, thoroughly read their legal documents, conduct legal and tax DD from 3rd party service providers. IC and Advisory meetings. Get approvals. :)
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Most Helpful
Jul 8, 2020 - 6:55pm

AlphaCompounder:

1. This can be an extremely long answer. I'll keep it short - the opportunity for exposure, meet and work with brilliant minds, put my analytical and logical skills to right use, $ increment from a Big4 role.
2. Over the years, the team members (10+ years each) have built solid connections in the industry. Networking events (eg. SuperReturn)+ leveraging our personal connects to stay in touch with these GPs. We also use databases (eg. Preqin, PitchBook, CapitalIQ) to find the funds in the market, do some benchmarking in terms of historical returns and then reach out to them when we are looking to commit to a typical strategy.
3. Placement Agents play a rather big role in this space. We are conscious of the fact that we may or may not know every single GP in this world. Over the years we've realized that few placement agents take very high-quality mandates and they are always good to look at. PAs are to FoFs what IBs are to PE/VCs - will always be critical to this industry.
4. +5+6- start with the GPs pitch decks, then calls with the teams, if we like the team and their strategy fit then we do a face to face meeting (unfortunately pre-COVID only). We keep a database of who all we've met/ our comments/ reasons to accept or pass. Start conducting intensive benchmarking with other similar funds in the industry/geography. Conduct reference checks on a few select GPs and independently rate them based on our proprietary ranking model. Select the top GP from this (always end up having heated debates within the team ;) ). Agree to commit to a particular fund. Start preparing investment memo. Conduct more detailed reference checks, thoroughly read their legal documents, conduct legal and tax DD from 3rd party service providers. IC and Advisory meetings. Get approvals. :)

Preciate you!

 
Jul 6, 2020 - 2:54pm

Thanks for doing this! So was wondering if you could comment maybe on the compensation and how it compares to direct private equity investing compensation. Also would a typical exit out of FoF Private equity be direct investing and what are types of things people could leverage a FoF experience at a big shop to do? Also what does the "carry" typically entail for a professional working at a PE FoF?

 
Jul 7, 2020 - 4:11am

Hi,
Globally PE direct investing comp>FoF comp. PE direct investing work>FoF work. PE direct investing mgmt fees>FoF mgmt fees
Not sure if a typical exit could be direct investing - skill sets required are extremely different. For PE Direct investing you need extremely stong FM, investment memo/deck making skills. You need to know how to read accounts - extremely strong technical skills (accounting understanding). FoF skill sets are very different.

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Jul 7, 2020 - 3:53am

Diverse backgrounds I would say. I'm from core business valuations background (strong analytical/ logical and excel skills)
At an Analyst Associate level - ideally someone with prior placement experience - they know how to evaluate GPs, which would be the most important skill. FoF teams are very small, everybody ends up doing everything. It is important to have good analytical and logical skills. Good understanding of the functioning of a FoF.
At an AVP or higher level - need excellent connects in the industry

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Jul 7, 2020 - 3:56am

Advice would be to be organised, stick to your investment methodologies - lot of times you'd want to close deals with just a shake hand but do your entire diligence. GPs push LPs on closings, don't let them push you around - do thorough diligence on every GP! Study industries globally and form your own opinion of which would do well in the future - very important to prepare investment strategies for your own fund.

 
Jul 7, 2020 - 12:59am

Appreciate you taking the time to do this.

  1. Does your platform also do co-investments and/or PE secondaries?

  2. Where are you based? Does your FoF split up coverage by geography or strategy?

  3. What did you do before joining this FoF, and how many years have you been there for?

  4. What does upward mobility look like at your firm and how are you thinking about your next move?

 
Jul 7, 2020 - 4:04am
  1. We have the right to co-invest.
  2. Yes - our fund splits coverage by geography (fixed), strategy (changes with changing macro conditions), eg. we had to take a step back and recaliberate our strategy our next investments.
  3. I used to conduct business valuations at a Big4 for 3.5 years. I joined this FoF 2 years back.
  4. You typically jump a position with every new fund generation/ earlier. I aim to stick around and make it to Partner by the next 2-3 fund generations.
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  • Intern in PE - LBOs
Jul 7, 2020 - 1:10am

Thanks for doing the AMA!

Is it possible to join an endowment or foundation after working in PE FoF? I'd imagine the skillset for evaluating fund managers would be very applicable.

Where do you see yourself career wise in the next 5 years?

 
Jul 7, 2020 - 3:59am

Absolutely - need exact same skill sets ++better understanding of risk allocation and portfolio construction as your every decision impacts multiple beneficiaries.
]I aim to stick around and make it to Partner by the next 2-3 fund generations.

 
  • Intern in PE - LBOs
Jul 7, 2020 - 10:41am

Thanks for the response! Now that I know that it's possible, how often do you see peers moving over to the foundation/endowment side? Is it a common move?

Also, can people join FoF after 2 years IB and 2 years PE or do people generally make the move after IB/their first role? And if someone was to come in after 2 years IB and 2 years PE what role/position would they typically join at?

 
Jul 8, 2020 - 1:57pm

Credit Suisse, Rede Partners, Asante, Probitas, Capstone, Houlihan Lokey, Monument Group

 
Jul 8, 2020 - 2:00pm

That would be taking away my job ;).
But jokes apart, there are multiple firms that do some great due-diligence work. We like to do the entire DD piece in-house, we learn a lot about funds and managers through the process - not something we can easily rely on if outsourced. We outsource the legal and tax DD portions.

 
  • Analyst 3+ in IB - Ind
Jul 8, 2020 - 11:37am

What were your hours like at the junior associate level and what are your hours like now at the senior associate level?

Which location are you based? US, London or Europe or Asia?

In terms of comp how does your base and bonus compare to similar levels in investment banking. I assume you already know IBD base salary ranges but for bonus comparison I'm at a top EB and first year associates at my bank can earn 100-120% bonuses and senior associates at my bank earn 120-180% bonuses although it varies depending on which bonus bucket you are. Curious to know whether FoF is less, similar or more?

What is the structure at your firm? Analyst > associate > senior associate > Principal > partner?

Thank you

 
Jul 28, 2020 - 1:32am

I directly joined as a Sr Associate. We have a very lean team - change in title only increases responsibility, hours are erratic based on work. I do good 10-12 hours a day on a regular day +lot of reading (to stay updated) in after-hours.
Asia.
PE bonuses are generally linked to fund performance, significant bonuses are possible if you're in a large fund, not in the one I'm at. Also, American vs European waterfall structure also makes a difference as you start accruing your carry in the very beginning if deals do well in American Waterfalls vs wait till the entire Fund does when in European structure (which is when you see good bonuses).
We are quite a young fund with a 5 member team - we don't have any set structure yet. But yes, you're more of less correct. senior associate > AVP> Principal/Director > partner?

  • 1
 
Jul 11, 2020 - 9:28am
  1. Your question is very specific. Yes, I do enjoy the role very much. FoF investing requires a very different skill set as compared to IB/Direct Investing. Requires lot more of "people skills" - learning to read people (fund managers), being able to differentiate the better ones from the group when every pitch you hear is rock solid! It tests your ability to read a person - something that has always fascinated me. In FoF investing, you are betting on the strategy and the ability of the manager to continuously choose the right businesses given the changing macro scenarios. So yes, I do find it intellectually stimulating to the extent that I'm continuously improving my ability to read people, not to the extent of building financial models and growing technical (accounting?) skills (I've done that for ~5 years in my previous roles).

  2. Most of the fund managers don't brag about their value creation abilities – they give specific examples.

  3. We monitor our portfolio every quarter (do not dive down a lot into their portfolios apart from the key financial performance metrics). I have created an excel tool to monitor this for now but in the process to get some 3rd party provider to do automate this for us.

  • 2
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