I'm thinking about launching a permanent equity firm and would like to raise the capital on a deal-by-deal basis just like an independent sponsor. Is this feasible? And how would this be structured from a management fee, carry, compensation perspective given that many companies would be a very long-term hold? Would love to get feedback and guidance from people who have experience in this space.
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Ah, the thrill of venturing into the world of permanent equity firms! Based on the most helpful WSO content, raising capital on a deal-by-deal basis for a permanent equity firm is indeed feasible, and it's a path some independent sponsors choose to take. Here's how this could look in terms of structure and compensation:
Management Fee: Typically, management fees are charged to cover the operational costs of managing the investments. In a deal-by-deal scenario, you might charge a flat fee per deal or a percentage of the capital invested. Since you're looking at long-term holds, the fee could be lower than in a traditional private equity fund structure, reflecting the evergreen nature of the firm.
Carried Interest (Carry): Carry is the share of the profits that the management team earns, and it's a big incentive. In a permanent equity setup, carry could be structured to trigger upon achieving certain performance milestones or during liquidity events like a sale or refinancing, even if those events occur far in the future.
Compensation: For long-term holds, compensation might include a mix of salary and equity or profit-sharing to align the interests of the management team with the long-term success of the firm. Equity or options in the firm could be particularly attractive, as they offer the potential for significant appreciation over time.
Remember, the key to success in this space is to have a clear and compelling value proposition for your investors. They need to understand and buy into the long-term vision of the firm, the investment thesis for each deal, and the rationale behind the evergreen structure.
And don't forget, while you're out there swinging from deal to deal, building your permanent equity empire, make sure to have a solid legal framework in place. This will help you navigate the complexities of deal-by-deal fundraising and long-term investment management. It's a jungle out there, but with the right strategy and a bit of monkey business savvy, you can certainly make it work!
Sources: Evergreen Funds/Permanent Equity, Development and Capital, Investment Sales Vs. Debt/Equity Brokerage, Starting your own Fund/Firm, https://www.wallstreetoasis.com/forum/real-estate/running-your-own-shop?customgpt=1
If you’re doing a buyout deal you charge a management fee from the company itself, likely as a professional fee and you put it as an EBITDA adjustment on sale.
For a non-control stake, you’d probably charge some to the LPs and some to the company, maybe they bill it as a consultant fee.
Carry is the same as anything else in PE
In what situations would it be more beneficial to have a structure like this compared to the traditional model?
The biggest is that it is hard to raise a new fund as you’re convincing people to give you money and hope you find multiple deals. Deal by deal is easier because they’re still underwriting you as an investor, but they also know exactly where their money will go.
In terms of why this structure is good, it lets you be patient with deals and avoid tbe BS that comes with a fund. Your IR is limited, you dont have the pressure to deploy capital a fund does, you probably have patient capital, you aren’t constrained by the investment criteria that a fund likely has, and you’re just more flexible.
I personally like this model in today’s market
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