Traditional MM PE Associate role or Partner in a new Fund?

alex93's picture
Rank: Chimp | 9

Appreciate your insight - I realize the answer is very person-dependent but it'd be helpful to hear how you'd underwrite the career risk here.

Context: A year and half ago, I accepted an offer with a August 2018 start date to go to a MM shop on the West Coast I was excited about - good comp, good culture, great track record, near family. A Partner I had summer interned with reached out asking if I could help him execute deals and consult him on fund organization. I left my investment analyst role (well-regarded firm) a few months earlier than anticipated to help with complete transparency that I was going to leave in August. The fund aims to fill an apparent gap in the geographic market - there are many startups/growth but little institutional early stage/growth capital. The Partner is famous in the public markets world but has never been a principal investor except for ~15 deals he's personally done in the last couple of years since retirement ranging from $50K to $5M. The idea is to raise a $25M fund as a proof of concept vehicle with attractive fees. Raising the money and getting differentiated LPs (even some celebrities) has been easier than I expected and there's been interest from institutional capital about our next, bigger fund.

The Partner just offered me a Partner title and 50% GP if I commit to staying long-term. He's a great guy and biggest influence in my life but he himself says he has a lot to learn about PE and leans on me to do a lot of the execution. I recognize it's tremendous financial upside (with the intent that our next fund will be $150M) but I worry about losing out on the learning that comes with a traditional PE Associate role. There's also the real possibility that the fund underperforms.

My goal is to eventually start my own fund in the future and I'm committed to private investing (honestly stage-agnostic at this point, though I philosophically like later stage investing better). How would you assess the career risk here? If all goes wrong with the $25M fund, would I be able to get back into a junior PE role? Am I being ridiculous for not jumping on this? I am all ears.

Comments (5)

Mar 28, 2018

First off, if someone has the @APAE bat-signal picture handy, it would be perfect to toss up here.

You're right, the answer is person-dependent, but I think the way you structure your answer and your perceived risks communicates some meaningful things about you.

I think it comes down to this: are you confident in your ability, right now, today, to be the guy the buck stops with and to drive the full soup-to-nuts PE process? That will be your responsibility, and it doesn't sound like you'll have a lot of help.

If you think an Associate role would be a water-treading exercise for a while, and you're looking for a fast-forward in roles and responsibilities that reflects your confidence in your current abilities, then go for it. But if you're still looking at a role to help you build out your skill set within a larger structure, this sounds like the opposite of that.

I wouldn't want to be a Partner at a fund that tanked, and it will tank unless you make it not tank. That's a ton of responsibility and it requires a very rare skillset. If that raises the hair on the back of your neck, good, it should, and you should take that risk if and when you're prepared to do so.

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Best Response
Mar 28, 2018

I don't often speak in such direct language on here, but I feel strongly enough about this that I'll offer a more unvarnished opinion. It's great that you're being thoughtful about this decision, but yes, you are "being ridiculous for not jumping on this".

Fundraising absolutely sucks. It's even more shitty when you're doing it as a new firm, and it's even shittier still when you're doing it as the founding GP.

The fact that you've got a fully baked situation here where you somehow wound up with a magic "Proceed directly to GO and collect $200" card and can skip that fundraising purgatory is going to save you no less than 24 months of your life. I mean that.

Your single problem in taking this role is that (as @Layne Staley aptly pointed out) whether you can adequately source, diligence, structure, manage, and exit a deal from conception to exit is still a question mark. You effectively have two of the three things necessary to run a fund: access to capital, bodies willing to do the grunt work, but not the proven domain-specific intellectual capital (know-how).

This is easily solved. Identify a few guys who are very senior and partially or fully retired at a good fund; this will look like a 'partner emeritus' or 'senior operating partner'. Get a warm intro or write an airtight cold email, then introduce your situation and make them an attractive offer.

[[ You're the younger partner of a prominent guy from a different asset class. Together you have the opportunity to launch a brand new firm, and thankfully you've had no shortage of access to capital. You (as a person, not a firm) are smart enough to recognize that you don't yet know everything you don't know, so you're looking for a more experienced set of eyes to help out for the next 3-5 years. That person doesn't have to do any heavy lifting, just make sure nothing is going horribly wrong or is completely overlooked. ]]

In exchange for him getting a title as a 'senior adviser', you give him 20% of the economics on the first fund and 10% on the second. You can now put him on your team page (which will help even more in raising that second fund), and he's also an in-house resource for any and all questions you have on deal and fundraising processes.

You now have all three of the necessary ingredients. Access to capital (partner you interned for), smart people willing to do the work (you), and domain expertise (adviser).

Your question has now shifted from @Layne Staley's "am I confident in my ability to be the guy the buck stops with" to "am I a quick learner".

That's a dramatically easier question to answer with conviction. A positive answer there also places you in a remarkably favorable position for the future. You own half of the GP of a fund with clear visibility on an expanding AUM base, you have mentorship, and you have a clear shot at running your own firm within 15 years tops.

This is effectively the same thing as starting your own shop, although you've cut out legitimately 90% or more of the headache.

Lastly, be smart and make sure you negotiate a right to buy out the founding partner's remaining GP stake. This should either be (i) a right-of-first-refusal (he has to show you before showing anyone else) or (ii) a right-to-match. Ideally you also include a price in that agreement, either a fixed dollar amount or fixed multiple on something (past three years' performance fee income, x-percentage of anticipated gross return on the latest fund, etc.).

Good luck, and congrats.

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Apr 10, 2018

Thanks so much for your thoughtful response @APAE. We do have a strong board of advisors on the opearating side (e.g. former CEOs/Founders with $300M+ exits) but we could use someone with investment experience as well. I'm currently identifying and reaching out to prospective investment advisors thanks to your advice.

One aspect that is becoming clearer is that the Partner I'm working with may be a detriment rather than just neutral. A lot of my time has been spent mitigating his actions such as sourcing bad deals. My girlfriend made the point that he's the opposite of how someone would describe a good business partner (e.g. distracted, poor communicator, not willing to work more than 20 hours a week, emotional). I'm happy to continue working crazy hours to make this happen but I do wonder if it's worth taking the leap with him even if I know there'd be someone in the future I'd rather co-found a fund with. Is his fundraising ability/connections enough?

Mar 28, 2018

I suggest that you map out a clear outline of:

  • (i) responsibilities
  • (ii) people [the existing Board of Advisors you just mentioned, plus the 'senior adviser' I mentioned in my first comment, plus any hires you can identify]
  • (iii) economics [who gets what portion of the GP, how will those relative percentages change with successive funds {your 'senior adviser' should be getting halved or taken to zero on fund two}, and what terms you get to buy out the old guy]


This should include fundraising, sourcing, board seats on portfolio companies, recruiting and hiring, managing service provider relationships, finance and operations, and investment committee.

(a) Describe what your deal sourcing and evaluation process is going to be. Figure out what software you want to use, what workflow you will follow, how you will log and track everything. Is everyone in the fund on their own island acting as a mini-fund within the firm, or is everything put on the table and shared for discussion from the very start?

(b) Create at minimum a three-person I.C. Ideally this is you, the old guy, and the senior advisor. If you have real studs on the board of advisors (and they aren't complete cronies of the old guy who he roped in because "Hey man, I'm raising a fund!"), add two of them such that it's a five-person committee. Note whether your committee follows a majority or a unanimity policy. If the latter, you can stick with the smaller committee of three (because no deal is going in the fund that you don't put your okay on).

(c) Fundraising is clearly the old guy's domain. Ask whether you intend to use a placement agent. If yes, you can take more of an ownership role in this process. A good agent conducts a thorough interview and data acquisition process with a GP team so that they know the whole story. They then either create from scratch or edit your existing marketing materials and liaise with all their LP contacts on your behalf through the fundraising process. The old guy is clearly not going to be doing the day-to-day of contributing to all the marketing material creation, so if you own that, you end up owning all the LP relationships for the future simply because you were the first point-of-contact for all of them.

(d) Finance and operations should be marked as a pending hire. You can't afford to screw this up and none of you have adequate enough experience to avoid all the missteps that are easily made in compliance, tax, accounting, audit, administration, etc.


Outline what hires you need.

(a) You immediately need an associate. I'd recommend not doing an analyst because someone with 0-1 years of experience is going to require a level of management that the old guy very likely doesn't have or won't spend the time on and you don't have the expertise for.

Some people might say a guy in your position doesn't want someone his own age or older as a direct report, but the upside of getting a competent guy who has already done a year or two in venture or growth equity is immense here. The old guy has no idea what he's doing and doesn't know that; you have no idea what you're doing but are at least smart enough to know that and be coachable.

(b) You need the COO I mentioned above. There are a lot of firms that offer O-COO ('outsourced') services. You get that level of expertise and service, but you only have to pay 50% of what you would for a qualified full-time hire. Assuming you're running a 1-and-10 structure on the first fund (since you mentioned the first vehicle has an attractive fee structure), you're only playing with $250k in management fee income and this is your smart bet.

(c) Make a clear map of why the 'senior advisor' is necessary and what he'll bring to the table.


(a) Have a clear sketch of what's on the table. Show what it looks like for you and the old guy to both have half the GP but give the senior advisor 10% of the first fund (not the parent GP entity).

(b) Model some returns scenarios: Fund I is a $25m fund that performs 3x, so there's $50m in profits (gross returns minus contributed capital) that you earn a 10% performance fee on. Fund II is a $100m fund that performs 4x, so there's $300m in profits that you earn a 20% performance fee on.

Sketch out some scenarios where your second fund is 'small', 'medium', or 'large' (whatever numbers you feel is realistic based on the soft institutional interest you mentioned). Show some conditionality for the performance multiple on each of the first two. This gives you a range of expected income for the first 10-15 years.

(c) Propose some structures for your buy-out option for his stake. Follow the variants I proposed earlier.


Sit down with the old guy and show him this whole thing.

Overall, this helps eliminate all ambiguity around who does what and for how long they do it. It is a fruitful exercise that (a) makes sure you're on the same page and (b) serves as the basis for how the internal docs (operating agreement for the management company and the GP entity) are drawn up by your formation counsel.

If he agrees with all your qualitative proposals and negotiates something you find acceptable on the quantitative components, you have your answer on whether it's worth the leap.

Your dream scenario is where he agrees to lend you the credibility of his name and his network, stay out of your hair on the day-to-day stuff that comprises the operation of the firm, and to submit to some basic governance where he can't do random deals that are going to stick on your track record and affect your shared performance.

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Mar 28, 2018