Small PE FoF / Co-Invest vs. Large PE FoF

First, your stated goals:

Chezparadise:

I want to learn as much as possible about the FoF industry and would appreciate wide exposure and doing interesting work.

I would pick the first option. The contributing factors are: - greater exposure - co-investment experience - lower bureaucracy or organizational politics and bloat

Exposure: You will learn more at a shop that has to deliver alpha through real manager selection than at a big, boring, sleepy old place that just chugs along because its scale and tenure has placed it in the tranche of the world where similarly calcified allocators just keep handing it money because of the narrow set of opportunities to park $500m commitments and safely get back an 8%+ net return.

The giant FoFs are by their size forced to stick with the big front-page GP names: there's a narrow universe of funds that can accept a $250m ticket.

The smaller shops don't have that issue of scale and can back:

• emerging managers (usually someone who comes out of a prominent shop with a strong attributable track record, e.g. Searchlight [whose three founders were the co-head of media/comms at Apollo, a KKR partner, and the head of PE at OTPP] but is on Fund I or II)

• managers whose strategy is scale-constrained (e.g. the guy who's figured out how to deliver 28% annually through a complex and unique fixed income strategy but can't tolerate more than $400m AUM)

• managers in geographies some LPs shy away from (e.g. some guy in Singapore who is crushing it in illiquid or special situations credit in smaller APAC countries)

Compare this to a giant platform:

• emerging managers are almost invariably a no-go; "no one gets fired for picking IBM" is the simplest way to say it - why go out on a limb for someone unproven when you can just fire a ticket into Carlyle VII (which hit its $18.5b hard cap, for the record) or if you're really feeling risky, into Fund II for one of KKR's new strategies (they launched a whole bunch of new real estate, growth equity, and credit businesses in the past five years)

• managers whose strategy is scale-constrained are automatically a no-go because they can't accommodate your minimum check size; neither you nor they want you to be over 10% (tops 20%) of their capital base as an LP, so if your minimum check is $50m, they need to be a $500m fund for you to dance; some of these giant FoFs have a $100/$200m minimum ticket size ... you do the math

• some geographies may be off limits due to political sensitivities; e.g. I know one big platform that has money from both CIC and CITIC; they did a ton of work on a manager in HK and ended up not being able to pull the trigger because the wife of one of the GPs was a prominent activist for the independence movement

Co-investment: This is important for two of your stated future goals.

• (a) If you want to deploy your $100m family wealth, you're going to get way farther doing direct deals than you are allocating to external managers. For one, you can cherry-pick individual assets: you aren't committing to a blind pool that gets weighed down by the underperformers, you can sit back until something great comes along and go in solely on that. Secondly, you skip the fee layer. A lot of funds will let a family office co-invest on a fee-free basis simply because (i) the fund needs more equity powder to get the deal done and (ii) wants to develop a relationship so that party ends up becoming a fee-paying LP in future funds.

• (b) If you want to go to b-school, you want the sexiest resume. Allocating to external managers doesn't get any adcom members fired up. Underwriting a few deals where you can bullet point exact dollar size, MoM, and IRR figures does.

Bureaucracy: I could write volumes on this. To keep it brief, you want to have a headache-free life. I can't stress strongly enough how shitty life can be inside a big place that has lots of different divisions, processes, and management layers.

You describe the first option as small, collegial, and flat. That probably won't end up being as true as you want it to be, but it sounds miles better than a place that's big enough to silo the primary fund commitment team away from the co-investment team ... both of which comprise one unit that's merely an 'arm' of a larger platform overall.

Second, the larger picture.

m_1 pointed this out already. Generally speaking, you won't really move the needle tremendously investing in external managers. The exceptions are if you can get the majority of your capital allocated into best-in-class managers like Bridger, A16Z, Benchmark, H&F, etc., however the problem there is that those guys are oversubscribed several times over. You basically can't get in at all; what's the draw for the GP to accept some random family, especially when the best and shiniest sovereigns and institutional LPs are already in line asking to fire in nine-figure amounts.

What I think he missed is that you aren't trying to be an LP in a FoF, you're trying to recreate a FoF on your own by building a portfolio of primary fund commitments. He's right that LPs in FoF get a shitty deal. They are paying 1-and-5 to someone who bears a 2-and-20 structure from all the underlying GPs, so their LPs end up bearing a double fee layer and the returns get pretty diluted.

I disagree that $100m isn't enough to get started as a lower middle market buyout shop. It is. In today's financing environment that can be anywhere from $400-800m of purchasing power.

I recommend that you take the first position, flex your co-investment muscles as hard as you can, go to b-school, and find all the super sharp guys coming out of megafund private equity associate roles.

Back two of them as a search fund. Hell, do that with a couple pairs. Add yourself as a 'partner'. Maybe dilute your concentration as an LP by bringing in the FoF you worked at before school; if you did your job well, there's no reason they ought to be scared of committing FoF role), your first call ought to be the FoF you worked at before school.

This ran long. I hope it's helpful.