Would you go work for a start-up PE firm?

Would you go work for a start up PE firm that just finished closing its first fund?

What would be the pros and cons?

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Comments (9)

Best Response
Oct 19, 2015

Depending on the track record and background of the partners, I don't see why not. If they successfully raised a fund then that de-risks the biggest part of going to a brand new shop: not having any capital to deploy.

Of course, this all depends on one's own current situation, other available opportunities, level of risk tolerance etc. but I think there's decent upside at the junior level. Pros would be potential for outsized comp (could offer some bps of carry at associate levels), knowing you just closed a fund so the firm will have steady fee income, probably a good learning experience. Cons would be uncertainty beyond fund I, lack of infrastructure/resources already in place, having to differentiate yourself in an already crowded space assuming this is a typical mm/lower-mm buyout shop.

Oct 22, 2015
Hugh Myron:

Depending on the track record and background of the partners, I don't see why not. If they successfully raised a fund then that de-risks the biggest part of going to a brand new shop: not having any capital to deploy.

Of course, this all depends on one's own current situation, other available opportunities, level of risk tolerance etc. but I think there's decent upside at the junior level. Pros would be potential for outsized comp (could offer some bps of carry at associate levels), knowing you just closed a fund so the firm will have steady fee income, probably a good learning experience. Cons would be uncertainty beyond fund I, lack of infrastructure/resources already in place, having to differentiate yourself in an already crowded space assuming this is a typical mm/lower-mm buyout shop.

Its an interesting opportunity and I think you basically outlined what I was thinking the pros/cons would be. But as you mentioned its a very crowded space and trying to differentiate yourself is definitely a real hurdle.

Oct 19, 2015

I'd echo what @Hugh Myron said and also ask if you have any other offers for other PE funds. If they've already raised money and it was a first fund they've recently been diligenced the shit out of so you probably don't have to worry about anything on that front (raising a first fund is excruciatingly difficult so props to them for getting that done in 2015) so if your primary goal is to get into PE and you don't have any other offers or don't see a brand name offer coming in, I'd say go for it. Since they have capital and fees coming in there's little chance that they'll fold so worst case is that you get a few years of PE experience on your resume. I'd ask about pay and bonuses and wouldn't expect it to be super high because the economics of PE work much better when you're on fund 2 or even 3 because you'll have those 2% management fees coming in, perhaps on more than one fund at a time, and some exits going on so there's much more money for partners to feel generous with. If you only have one fund and you're not getting the 2% until the capital is deployed the partners may not have the money to give big bonuses.

The upside is that you're joining a new firm at conception and there probably isn't any real bureaucracy in place and there's a decent chance that if they do well and you perform you could rise through the firm. That's not that easy in today's PE market. And normally when you raise a fund, especially a first fund, you need to have a pipeline of deals queued up and the partners are going to want to close deals very quickly so that they can prove to their investors that they made a good choice and they'll want to show results quickly so that they can raise fund II asap. So you should get a lot of exposure to deals and the whole private equity process in a short amount of time. If you're only there for 3 years you probably will have the opportunity to work on a good percentage of 8-10 acquisitions because it's all dry powder that they want to put to work and I'd almost guarantee that they'll be running super lean.

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Oct 19, 2015

As expected, @Dingdong08 is on point. It really depends on where you are in your career/life. I would consider joining a start-up fund if a number of things lined up:

I would want to make sure that the team had previously worked together. This ensures that everyone is on the same page and has the same thought process, expectations, etc.

I would also want to ensure that the team's investment philosophy was similar to the fund that they spun out of. This would ensure that the team is experienced in what they are doing and have had success. It also makes the story more believable to LPs, which is undervalued.

Furthermore, I would want to confirm that the fund has several institutional investors. If the fund does not have a strong base of institutional investors, it maybe tough for the fund to raise Fund III or Fund IV later on.

I like the appeal of a startup fund because they can offer incentives and compensation that more established funds do not. These could include an equity stake in the GP and carry, but that's typically for more senior individuals.

In addition, start-up funds provide the opportunity to be involved in many different aspects of the firm such as business development, fundraising, etc.

Hope this was helpful.

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Oct 22, 2015

Thanks for the very helpful responses, some I did expect some I did not. I was reading through the other thread about the guy who inherited a bunch of money and wanted to start his own PE funding. I think the big thing is that they closed funding - and that provides a level of comfort.

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Oct 20, 2015

Most has been covered but I'll add my $0.02. As a background I've worked at three funds:
- $500M AUM on Fund II
- $2B+ AUM on Fund II
- $5B+ AUM on on a double digit fund

Pros of going to a smaller, younger firm
- Less bureaucracy
- Chance for better economics (perhaps not always base/bonus but usually on carry)
- Chance to establish yourself and scale in various experiences more quickly
- lean deal teams so more reps potentially
- Chance for long term job (i.e., direct promote) which can lead to great financial gain and personal enjoyment

Cons
- Quality and ability of firm heads to lead
--> A lot of new funds are being raised by ex-MF or brand MM principals. As a junior level guy, it can be tough learning as fast as you would at more established funds. For example, at a previous fund my MDs were all < 10 years out of B-School. I felt they were still doing trial and error on the various deals compared to my current MD who has done 30+ LBO's personally and has a system down for most business models and economic cycles. They were all very smart and great to work with, I just know which one will teach me the most
--> Furthermore, some of the lack of structure hindered focus on mentoring skills at the junior level
- Less middle management
--> If you are considering an associate role, there is a big difference between a deal team that consists of a MD/Principal/VP/Associate and one that is MD/Principal/Associate or another combo. You can be left to problem solve solo much more often and you may learn slower because your direct report doesn't always see it as their job description to get in the weeds with you
--> I'd really not overlook this personally. Mentorship/fast learning is the most important thing in my opinion
- Less junior guys to bond with
--> Sounds dumb but I've been in a class of 1, class of 3 and class of 8 analysts/associate/sr. associates and I loved having the larger class. You picked up hacks, best practices, networks and experiences the fastest in the larger group

My personal opinion -- get really solid pre-MBA experience at established bank/consulting and PE firms if possible and then head to a more new firm that you can be a rockstar at and really provide value add building its future.

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Oct 22, 2015

Interned at a relatively new fund, (6 years old at the time with two closed funds). From my perspective, having at the time zero idea how real world PE worked:

Pros:
- face time with the principals who were actively leading and discussing strategy
- close relationships with associates/VPs who could coach on how to read into potential investments
- work/life balance as most of the firm had families and did not spend obscene amounts of time in the office
- Ability to meet operating co. management and "get my hands dirty"
- possibility to buy in?

Cons:
- future scale: harder to start small and go big
- lack of fundamental training of PE (proprietary training could be hit or miss depending on where you go afterwards)

Cons list is admittedly short because I was enthralled at the idea of working for that fund out of college.

Oct 22, 2015

Just curious, how much carry was negotiated? There doesn't seem to be a standard anywhere but I was wondering what that number might look like for a start up fund.

Nov 9, 2015
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