How to Diligence a Newer Firm?
Background - I’m a non H/S/W MBA student that has been searching for a PE internship for this summer (planning to do search if don’t find a job I really like).
I knew I would have no chance at the Blackstones of the world, but I’ve been cold emailing smaller firms for the year completing dozen of interviews and receiving a few internship offers. I have one at a LMM firm in LA and another at a very new firm (2 years) in NY.
The NY firm has an incredibly legit founder (as good of a background as I’ve seen), and it was by far the toughest and most thoughtful interviews I had. However, this guy is around my age and has only run a fund for 2 years. What questions should I be asking in my diligence process to decide if this is truly a good opportunity or if the firm will just die?
I would focus on fundraising and pipeline/sourcing. Someone of that age probably knows enough people on the deal side to last them one and a half funds tops. They're just too young and short of having a really, really impressive family background, it's going to be tough to drum up new business. Everyone nowadays says they have 'proprietary sourcing' and it's usually horseshit.
On fundraising, I'd focus on whether this is a fundless sponsor (deal-by-deal) or if he's already raised / raising capital. Ask him who the anchors are, how much he's closed, who (or how much) is in the pipeline. Whether he's working with a placement agent. How much he plans to build out the team this fundraise or in the coming 5 years. Ask whether he has attributable track record (I'd be shocked if he did given his age and especially if he's coming out of some 'prestigious' shop that doesn't typically allow folks to take track records for marketing purposes to their next shop). Ask if there's been turnover in the last 2 years. Ask if he enjoys pitching the fund to investors (if he doesn't and thinks his main job is investing, then this fund is already dead in the water).
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