Start up fund
Hi all,
Hope you are enjoying the holiday season.
I have an opportunity to rejoin a firm I worked with before to help them start up a public value-focused fund. They have historically invested in private assets but have ~€20-40M they are willing to commit to this. Even though I am just finishing my analyst stint, they proposed that I would work as basically the PM (under tutelage of one of the partners).
I am passionate about public investing and have been investing on my own for a year. The mandate would be very broad and interesting (concentrated with focus on value / quality, small/mid cap names). Their plan would be to build a track record to then fundraise with a couple of family offices (they have a great track record on the private side) and launch a proper fund, and would be willing to make me partner of that fund (even putting it in writing).
I see a lot of upside and the opportunity to do something that I am passionate about; on the other hand, I was recruiting for more typical PE / HF positions and would miss out on that more certain path. Would be very interested in hearing your view on this. They asked me to "name my conditions" so any input on e.g. what % of P&L it would make sense to ask for would be greatly appreciated.
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It baffles me how risk averse people on this forum are. If you don’t take risk in your career you’ve already peaked.
Obviously pay attention to terms of the arrangement to make sure you are compensated for your time/effort as a jr. PM. But other than that, you should take the opportunity if you like public equity investing.
This +SB.
OP if you like public markets investing and that's what you want to do, well this is your chance. Oh and you've previously worked at the place and know the people, so there is less people risk? Easy.
Do some more diligence (on the people, the shop, the other products - to make sure the place is somewhat stable as a platform) etc. though.
So many of the "greats" in this business started out young and didn't know jack. Literally. Enough of them will admit it too, if they speak freely. But that's when HF was a growing industry and new. It's tough to get that opportunity now. You may have that opportunity. So why not bet on yourself? Honestly, lack of experience aside, most money managers across asset classes are mediocre and no smarter than you, nor do they have any edge? What happens if you lose money or get fired? Congrats! It happens to like everyone in this space. Literally. You can probably get into another fund or B school or network around.
On salary/payout negotiation - I can't say I'm good at this... But worth thinking to ask for some kind of flat base (mentioned in other posts) and something like 8%-12% of PnL perhaps.... 4%-5% seems really low and pretty junior. After all we are not in this business to work for free.... The much payouts people mention here are at MMs. And remember they run risk really really tight and use a fair bit of leverage. I am thinking your shop will not be like that. Usually the rule of thumb is the higher the payout ratio, the tighter the risk limits and vice versa.
There is also the part you need to think about which is how much of that is cash paid out end of year versus deferred or put into the fund (ie. supporting your own fund and believing in yourself).
TLDR: (without me knowing more about you or the situation), take the opportunity. At the least you will learn a lot about markets, investing/trading and yourself. Much more so than working for some schmo (There isn't much mentorship in hedge funds, it's a cold cold space).
Good Luck
16-18% of P&L at a multimanager is the norm for a PM...so why not just ask for that...plus ~30 bps of AUM as a base salary (should come out to around 150k with current AUM..so just figure whatever that is)? If the fund grows 10x to 300mm, then your "base salary" will grow 10x to 1.5mm
Thanks for the comments. I agree on the risk aversion - I am inclined to take this. But as any good investor I like to study the risks well before jumping in.
on the comparison to the multi managers - my understanding is they get 15% of the P&L pre-leverage, which is pretty small due to the market neutral nature of the funds and tight risk limits. Do you think that would still be appropriate in a more concentrated, long bias fund that would be expected to generate +10% returns?
the PM gets 15-18% of P&L (different funds have different deals with their PMs)...so whatever that comes out to.
With 30mm AUM...assume 10% return = 3mm P&L
15% * 3mm = 450k
+ base salary 40mm * 30 bps = 120k of the 800k mgmt fee (assuming 2% of AUM is the mgmt fee)
They may push back on tying your base salary to the 30 bps of AUM...because obviously as (if) AUM grows then your base would grow proportionately...but in this way, all incentives are aligned.
However, in this case....what's left on top of that for the parent firm? They will want to profit at least as much as you from the fund...so you probably can't get both. Either you can get a % of AUM..or you can get a % of P&L..but you probably can't get both.
At a Multi Manager, you get a flat base salary (150-200k) + 15-18% of P&L and that's it...so you are paid based on your performance. Good years are great..bad years are horrible
Understood, thanks.
What are your thoughts on the downside scenario to this situation? (ie fund ends up not performing well and I am fired in 3 years time) Is B-School the only option or would it ever be possible to transition to another fund (given I would still be fairly junior by then).
This is horrible advice and shows you don't understand the economics of MM funds. Yes, they pay 15-20% of P&L to PMs BECAUSE THEY PASS THAT THROUGH TO INVESTORS, and in addition they charge 20% performance which goes to the owner of the GP. Unless your new fund has such a fee structure ( no chance it does), you're massively out of line asking for 15-18% of P&L. What would be left for your partners that are sponsoring the fund???
Bump - would appreciate thoughts on what would be reasonable to ask for the equity portion of a subsequent fund that they raise. They said they would be willing to put that in writing already. I would expect the fund to be at most 150m so I think 25-30% equity would be needed to make the upside worthwhile.
What is your current background? You said you're finishing your analyst stint so I figured 2-yr IB program but you also said you worked for this fund in the past? I would advise you to hold out for prestigious, scaled SM HFs or MF PEs (several threads about this over the last 2 months).
If I understand your situation correctly, getting to PM after 2 years IBD is a very rare opportunity - but are you confident that you're ready for it? I appreciated my IBD knowledge but feel that 99% of my banking class would've been ill suited to make the leap to PM. If the fund's primary business is in private markets, I'm not sure how helpful mentoring will be due to their lack of experience in public markets.
I think others have given great answers on thinking about economics. I'd also advise you to be very clear on other terms - drawdown limits, factor neutral, sector exposure, etc. The terms they offer you have to be realistic enough to use to raise money on too (i.e. tough to ask family office to pay 2/20 if your marketed vehicle was basically LO growth).
This is the riskier career move but I think it also has some downside mitigation. These guys clearly like you and think very highly of you so if the public side doesn't work, this fund could potentially let you transition to the private market side (rarer transition but does happen).
I'm more risk-averse given that my risky HF career decisions failed but good luck if you do decide to pursue this opportunity. Judging from your question on economics...it looks like you're leaning toward taking the role so hope it works out very well for you :).
Just curious, why would you expect the fund to be only 150mm?
Thanks for the input. I did an off cycle with them (worked on the private side plus some opportunistic public investments, which they were already doing then) before joining my firm full time. For the last year and a half I have also been avidly reading about investing, investing my own portfolio and participating on Value Investors Club, so I have built some basic knowledge. Still it would be a very big leap and I would be out of my comfort zone for sure.
I agree that the mentoring may be limited. Still, I think they are good investors on the private side and we would be investing through committee, so I would have the IC as a reality check on my analysis. They have been doing this on and off through a small opportunistic fund that they have (which invested firm money across the cap structure and public/private), with good results. One of the partners also used to work at a HF (plus has a strong personal track record) so I think he could be helpful. Regardless of that, I would not have nearly as much support as in an established SM and I would have to self learn a lot.
On the downside protection, apart from transitioning to the private side, am I unreasonable to think I could either 1) call up the headhunters again to try to move to another fund, or 2) go for an MBA? I am thinking eg Columbia would appreciate this experience and their Value Investing program would position me well to return to the industry. Most of the partners are also from HBS/GSB so I think I could get good recs there.
On the 150M - with this type of bootstrapped operation I think it would be tough to raise from institutions, and in my region there is a limited number of family offices. In an upside scenario we could build off of that start and raise with institutions, but I wouldn’t want to put that into the base case here.
That's good context for your decision. If they have been doing some public stuff opportunistically, they'll be less likely to pull the plug if there is some short-term underperformance. I was afraid of some scenario similar to BX's Senfina platform which had a rough stretch and was shut down after a 3 yr trial.
I think you can definitely reach out to those headhunters - and if there are any you trust today, you can also get their input on this decision (again, I only trust 3-4 headhunters out of 30+ I've interacted with over the years so would be cautious). The opportunity set that exists at the age of 27 is different than that at 24 - several hiring PMs want to hire someone with limited public market experience so they can be molded to their style. Several don't want to bother with teaching someone the very basics of investing. But to cut to the chase, you will have likely have less opportunities in 3 years from now than you do out of 2-yr IB. Going to another HF will be easy but going to PE will be tough.
Unless the private market fund you're going to is prestigious, you will likely find it tough to transition into a prestigious scaled SM as well - not a hard fact just a reasonable comment if you look at profiles of people at maverick, select, tiger cubs, etc.
I think MBA is a very plausible option as well. Also maintain extremely good relations with the sales people at banks - they and PB often know who is hiring.
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