Have you guys heard about these? Basically a H/W/S grad setting up a one man PE fund, taking money from investors to acquire a company and sell it for a profit in 4-5 years. Any of you BSDs out there thought about doing this? Seems pretty risky from the view of an investor, you’re giving you’re money to some late 20s to mid 30s dude to generate a return all by himself, using just one company. Unsurprisingly 1 in 5 of these fail, but there are apparently some 200 or so such funds out there.
1 in 5 failing is a pretty good rate.
Any statistics on IRR of the asset class? (don’t have a FT subscription so if it’s answered in there, my apologies)
I know several people that do this and they have all been successful with it although probably there are lots of failures too. I think the issue is less age-based and more the fact that it’s hard to get a really good PE deal when you are not part of a sourcing network. Why are any of these guys likely to see deals that have already been heavily picked over and passed upon? Usually it is because they are doing tiny microcap stuff, which is generally less appealing anyway.
I know one guy who has done a few of these and has a 40% compound return doing it over a few years but he’s probably an outlier. I think he is about 30-32. The deals are all small in the single digit millions range, probably all under $5mm.
Personally, I would much rather have a sustainable long-term business. I am in discussions with several large family offices about being a seed investor where they would write a $20-50mm check for part of my business. That’s a good deal if you can get a check but it’s <1% close rate at the best family offices and there aren’t a lot that are even in the business of seeding emerging managers. You need something special.
Yeah I read that wrong, I interpreted it as 80% fail, when it’s actually 80% succeed, which doesn’t sound so bad. I think I just had a negative impression of the article.
Article doesn’t include ROI, but it says the funds seek about $350k - $500k from investors, 2-6 months of raising capital, 1 to 30 months seeking a company, 6 months to raise acquisition capital and buy. Then 4 to 7 years to create value and exit. So you’re potentially looking at 10 years before you see a return. The Stanford link claims aggregate IRR of 34.4% from 100 search funds in 2011.
Most of them are a lot faster than that. I don’t recall ever hearing of someone taking 30 months to seek a company. Usually you have a target in mind and people invest in that specific deal. A blind pool would be a tough sell. Of course people do try to raise money for SPACs but as we all know most of those don’t do well over time.
A little bit off-topic and somewhat of a downer, but I’m skeptical of PE reported results, especially IRR:
http://www.cfapubs.org/doi/pdf/10.2469/dig.v39.n2.28 (the hazards of using IRR)
http://groups.haas.berkeley.edu/accounting/fraudconference/papers/Brown_Gredil_Kaplan.pdf (do PE funds game returns?)
I’m also skeptic at the 80% survival rate - this seems way too big for any kind of entrepreneurial business. But maybe those Stanford guys are killing it.
It depends on how the failure rate is determined, that is probably the deal failure rate. The actual failure rate is probably 80%+ since most of these people never close a deal and just pack up shop.