Startup PE Shop - Self Funded

LBOking13's picture
Rank: Baboon | banana points 105

I was recently offered a position at a very small PE firm.

For background:
-The firm started 2 years ago. Very small <10 employees.
-Deals are closed entirely by in-house capital. The partners come from wealthy families and access to extensive capital. On a go forward basis they are entertaining the idea of a potential "fund" but are content with the current deal by deal structure.
-They usually target smaller deals 10-25MM in EV and Have since closed 4 deals bringing in roughly 500k in mgt fees.

I understand the major pros and cons of joining such a small firm but it seems as if they are getting some traction in regards to deal flow. My question is - given that my only other offers have come from BO MF PE and F10 Corporate Finance I feel as if this opportunity is the best bet for my career. I am a very risky person and see the vast potential upside if this firm was to escalate quickly. Thoughts? Am i being too optimistic? Feel free to ask additional questions - was trying to keep this post short.

Comments (33)

Feb 26, 2019


Feb 26, 2019

"in-house capital.. wealthy families" - typically thats referred to as a family office.

I would weigh this one against the F10 corp fin, if you're entertaining this option at all you don't sound like the BO type.

I think if you respect and gel with the team, they are offering you a piece of the carry, and you're going to be on the investments side, its a good option for someone with a solid risk appetite. A family office like that run by family members isn't likely to promote outsiders up to the top, but you could get good deal experience. The problem will be the exit.

The F10 will be the conservative route that could set you up for B School and another run at IB -> more institutional PE, but thats a highly competitive and uncertain journey.

Depending on the culture fits, I would lean toward the small shop personally..

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Feb 26, 2019

I guess you could classify it as a family office - but for the sake of calling a spade a spade the work i would be doing would be PE focused (FO role). I see it with a lot of upside - lots of exposure to every aspect of deal execution, connections to family network,better work life balance, and huge upside with potential carry (he mentioned carry as a point of conversation later down the line).

I guess my bias is attributing their current closed deals as enough "evidence" to prove their legit and not another bust of PE fund. I have worked previously with a couple of the guys, and i know we gel well.

Is there anything i should be concerned about?

Feb 26, 2019

Closed deals are obviously a positive. Exits under their belt would be the "evidence" needed to know if this is sustainable.

Feb 27, 2019

What's your background? where did you work with the guys before? how was your experience, are they professionals? what is the career trajectory promised? what are your plans in life? all these are important questions to answer if you want inputs.

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Feb 26, 2019

Well, I'm coming straight out of undergrad. Non target. Internship experience is in VC/PortMgt/PE.

I worked previously with them at an LMM PE shop. I was one of the 4 interns and they were associates. I really enjoyed working with them and could tell that we were on the same wavelength for a majority of the deals we were apart of. From my experiences with them, I would regard them as professionals. No reason to believe otherwise. And like I mentioned, they come from distinguished families and have proven track records.

As far as career trajectory. i would love to work in PE long term - Deal side would be awesome for a while, but I have always had a draw towards ops as well. I couldnt bear the thought of a standard 9-5 F100 job for the sake of security.

And as a side note. In my mind, it seems like they are taking a shot on me (nontarget, no banking, etc). I just dont see this kind of opportunity presenting itself to me EVER again in my life and the potential upside could be great. My rationale for even applying to the F100 role was because of brand name to potentially swing a M7 program and eventually transition to the stereotypical IB/PE route.

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Feb 27, 2019

Apologies for the disappearance - had a tough week.

So i read your original post a few times and then your responses below, and my question is what are you waiting for to take that offer?

As far as I understand, this is the situation at hand:

  1. You've graduated and the only two offers you have are a BO job and an entry level corporate finance job at a Fortune 100 company --> you don't like both offers
  2. You're offered a spot at the family office in an investing role
  3. You've worked with the principals before and you like working with them, have a good chemistry
  4. They've demonstrated a track record of sourcing deals, raising capital, and executing transactions
  5. You've a guaranteed chance to start in PE (everyone's dream after 2-3 years of hell in banking or consulting with no guarantees that they can cross to the buy side)
  6. You think it's the opportunity of a lifetime

So what are you really thinking about? And why would you want to go to corporate finance role you don't like to try to go to business school only to "transition to a stereotypical IB/PE route" why do you want to be "stereotypical"? You've got a chance to be original and if it doesn't work for a couple of years, you will have experience that is different from 95% from the class who all took the "stereotypical" route.

If I were you I would diligence this differently; I would ask about career progression, potential path to partnership, mentorship and regular time with the principals to develop yourself, etc.

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Mar 4, 2019

Experience is what you make of it within the limitations of the actual job. Take the gig. Get some reps under your belt, and trade up later if you're not happy.

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Mar 5, 2019

Seems like a no-brainer. Take the PE gig.

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Mar 5, 2019

Sounds like you don't have many other options. The gig sounds pretty cool, take it.

Mar 5, 2019

Dont listen to the people above you. Its a no-name PE gig, with zero credibility and no one will know what youve done. Ive seen former BB IBD classmates get shunted to lower-MM PE gigs and they struggle even come back into banking. If it works out, great, if it doesn't you have nothing to fall back on e.g. name brand.

PE isnt created equal, and a "fund" without an LP isnt really a fund (obviously ex mega-family offices).

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Mar 4, 2019

You have no idea what you are talking about.

Mar 5, 2019

Don't be mad you guys work at a small shitty fund.

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Mar 5, 2019

I agree with most of the posts here that depending on your risk appetite, this is an attractive gig. In terms of choice, it is between this and the corp fin gig.

Keep in mind that the biggest factor to weigh here is a) whether you think they have an appetite to get deals done (which seems to be the case and b) if your role in these will be substantial both from the diligence standpoint and also post-close. The post-close work is key, because it will set you up for the operating path if you decide to go that route.

In the LMM, there are many structures (funds, family office, fundless sponsors, fundless sponsors with FO arrangements) so moving to another shop will be possible, but won't be a slam dunk.

If the worst case happens and this doesn't work out, no one will really fault you for taking the risk, given the opportunity.

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Mar 5, 2019

I work at a similar firm right now. Although in my case it's a single family. Also, I'm much later in my career (left banking at a mid/senior level to join this place).

For me, the biggest thing by far was making sure that the deal flow would continue, i.e. that the family wouldn't decide one day to close up the office and let private wealth managers handle it all.

Once it became clear that is unlikely to happen (family demonstrated their commitment to having an office and staff to source their own deals), it was an easy decision, as it should be for anyone who has a real passion for investing and not a lot of options for getting into an investing role.

Only difference for you is that you're much earlier in your career which means you will have chances down the road to get to the buy side. So at this point, you should do whatever will build your skills. If this MF office is committed to the mission and can pretty much guarantee that you'll have deals to analyze for a few years, that's excellent experience that would put you in position to do a lot of different things down the road.

On the other hand if you get the sense there is materially high risk that the office could close or go stagnant, consider the F10 job because at this stage in your career you want quality skill-building experience more than anything else.

Feb 26, 2019

Appreciate your input. Some additional details:

The principals that started this (the guys I know) left their high-paying gigs to pursue this full time. I do not think this is something of a test-run as they were in PE before and left to start a firm on their own. I do not have concern for deal flow/motivation, however, I do have a slight concern in regards to their eventual exit ops (more-so how their investments turn out). While they do have extensive capital, I would hate to see the firm tank after a couple of bad deals approach exit. As of now I am leaning towards the PE gig over the F10 job.

Mar 5, 2019

What is the compensation for each?

Feb 26, 2019

~75 base for F10 with 10% bonus
~80 base PE but we didn't talk about bonus

Comp isn't the deciding factor for me, leaning towards experiences over pay/benefits. The F10 role would have great healthcare/401k match/etc compared to the PE gig.

Mar 5, 2019

Certainly understand that. I'd say go for the PE role as it seems like the better experience, pay difference is negligible (also big upside potential on the PE side if things work out), and at the end of the day it wouldn't stop you from pursuing a F100/corp fin role in the future. Just my $0.02.

Mar 7, 2019

I would 100% do the PE role. If you scale cleanly then they'll throw more responsibility your way than you know what to do with.

I would find out how existing deals have played out to date before jumping in though. Keep in mind that IRR for a fund doing deals that small should be much much higher than the typical LMM fund so don't benchmark against your typical LMM fund with $500m - $1B under management.

Was it them that brought up the ~$500k in management fees by the way? Seems like an odd thing to bring up when equity is being sourced from family.

Feb 26, 2019

So i initially had the same concern. Why would they be paying themselves? lol

However, from my understanding, the equity checks have played out 2 different ways in the deals that they have closed.
1) It seems as if their prospective investments are very lucrative in terms of cash flow. Because of this, they have been able to structure some deals where the lenders are offering equity checks alongside their loans. This enables them to swing mgt fees in those discussions.
2) they do have some deals where equity checks have been sourced externally. But like I said, this is done on a deal by deal basis, and not in a typical fund manner. I know one of their deals was closed 70% with external capital. Bringing in mgt fees because of that.

Mar 7, 2019

Makes sense. So basically an IS model and using mom's money as their portion of the equity an IS would contribute.

How is actual performance of the companies they have purchased? That's going to be the only real indicator that will tell you if they are worth working with or not as running your own deals/fund is very different than working at one. Although they aren't using their own cash so I guess the psychological mindfuck isn't bad.

Mar 7, 2019

I'll add an alternative perspective to @Mephistopheles'.

Fundless sponsors are a different animal in the private equity universe. The majority you'll meet are guys who washed out of a real shop with committed capital and the traditional fund model with LPs on a capital call schedule. The stereotype is that they see shit dealflow and have lower deal-IQ.

What you're describing sounds pretty different than that though. I can't count how many instances I've seen kids from a family background of wealth go off and spend the first 3-5 years of their career cutting their teeth on someone else's dime, paying their dues, and learning the ropes before striking out on their own with their family's backing.

If you're telling me you met the two of them when they were associates at a traditional lower middle market buyout shop, that probably means they went to decent schools and also likely did banking beforehand - tell me if I'm wrong here.

Then you say they've already closed four deals and that those deals included external equity checks? This proves:

  • they know how to run process well enough
  • they have deal flow of some kind (and you say the assets are attractive and indicate decent growth prospects)
  • they're proximate to and trusted well enough by other check-writers to attract co-investors for the equity portion of their deals

This doesn't sound like Dickwad Capital Partners. It sounds like Family-Backed Emerging Manager Capital. That's a great shop to join. A lot of experienced guys with a middle market background look really hard for this type of opportunity. It offers a lot of upside:

  • a chance at meaningful carry
  • better work-life balance (people from a family background like this don't have to work themselves to death, so that mentality probably trickles down through the firm)
  • some freedom to carve out your own niche and own your own deals end-to-end (a lot of places are top-heavy and don't offer talented junior or mid-senior staff the room to run)

Add all that up and I think this is a pretty compelling opportunity for a two or three-year initial role. Factor in the fact that you say your profile is less than remarkable (non-target, no analyst program) and it starts to shine even more.

The one downside here is whether the management company has adequate working capital to fund operational expenses. If they only have $500k in earned management fee income, I'd be slightly concerned whether they were going to have runway to pay me my hopefully six-figure annual salary. (If I'm going to get $100k for two years straight, that means I'm 40% of the total management fee income the firm has earned.)

I would ask some probing questions around this while you finalize the offer; if you feel satisfied that there's enough stability (perhaps they get a working capital line of credit for the management company, or make a GP commit to cover overhead), I think this is a pretty good opportunity for someone early in their career who wouldn't otherwise have a high-probability shot at the industry.

Good luck, and congrats for having this option in hand.

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Mar 4, 2019

I agree with you. I just think he needs to be extremely careful to make sure that your assesment is correct. Pretty rare to find, but if true, could be a place worth sticking around for a few years.