Sketchy First-Time Funds - Red Flags?
What are some red flags to look out for when evaluating whether to join a ~$100M fund?
Emerging market focused fund looking at $3M EBITDA firms. It's in a geography I like and I respect the fund's seed investor. The two managing partners have solid backgrounds working in MF PE but this is their first fund striking out on their own.
The firm is still very sweaty as they've only raised 5% of the fund's target so no one is drawing a salary yet. It's just the two partners right now and then potentially myself + a few interns.
I've been offered to come on part-time (currently enrolled in a FT MSc. in Finance program so the time commitment works well for me) but this position is unpaid. Presumably I'll be working on things like drafting PPMs, LP lists, presentation materials, building out internal systems ... and if things go well with their fundraise... then actually analyzing opportunities. I'm actually the only one on the team who is actually from this region so I will get facetime with potential LPs and potential investees (good optics for the Partners).
If they hit their first-close target then they will be in a position to offer me a FT role (no guarantees obviously)
I'm a big believer in learn before you earn but my gut is telling me the value transfer here is a bit one-sided. What love thoughts from others. Am I just being an entitled millenial? As far as title's go, they're open to having my position, on paper, be "Associate". So at least I can have that on my CV if this experiences amounts to nothing.
I care very little about 'prestige' ... my long term goal is invest in this particular emerging market region .. so I'm interested not only in building PE experience, but doing it with a fund that has this region as a mandate (which is very rare).
Apologies for the long thread - hoping to hear feedback from more experienced folks. Thank you.
Don't have much to add but the fact that they aren't paying you is a red flag (even minimally).
It's a high risk for sure but since you're in school, it sounds like it mighttttt be worth just doing it and seeing how it goes.
FWIW, I joined a first time fund and am drawing a salary. We are working towards a first close on a fund but I guess we have some fees coming in since we did a handful of independent sponsor deals.
What are your thoughts on the independent sponsor model in general? Have you encountered scenarios where the independent sponsor only acts as a broker (of sorts) connecting the opportunity to capital (and taking some type of success-based fee / % of the transaction and rolling it into equity) or are the independent sponsors typically playing a more active role in the investment post-transaction?
From what I've experienced, no. The independent sponsor is very much like a normal PE GP but without the committed capital fund which makes the actual financing of deals a key hurdle in closing any investment. It's not like a broker because we still manage the investment/company on behalf of the LPs who've funded the deal.
But in general, the independent sponsor model is hard to pull off long-term. We only do it because we are trying to raise a first fund and you gotta show LPs that we can 1) find attractive deals, and 2) execute them. There's a lot of other perceived and actual negatives. Sometimes you get perceived as an inferior PE investor (despite most of us coming from respectable names) and most of the concerns from the seller perspective is the certainty of close, which makes sense. You can run a deal down to the finish line and then have the financing fall out for a variety of reasons.
Other than that, a lot of my other grips stem from not having a sizeable amount of management fees which means I don't have a budget to invest in stuff like software, very picky on which cities to visit, no meal stipends/expense polcies, and other general perks that I had at my previous firm. Some of these are obviously trivial but I do think the lack of having a technology budget, for example, makes my day-to-day more tedious but not impossible.
I've been at an early fund and worked closely with a pre-raise fund, just like the one you're describing. A couple of things I'd look out for:
With all the being said, you're in school and have little to no experience, so hanging around them for 15-20 hours a week, or whatever you can commit, should be valuable either way. Do it for 3/6 months and see how it plays out.
Awesome advice. I am in a similar situation and would like some advice. Could you pm me since I already reached my daily pm limits? Thanks!
Thanks for your advice - super helpful and much appreciated!
Do it for experience if you don’t have any better offers. If you get better offers while you work there then they can’t blame you for leaving. See if you can get some sort of bonus if you help them with the fundraise.
$5m out of $100m is a long way to go. Like someone else mentioned they should have a cornerstone for 30-40m in my opinion.
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