I have one coming up. I was wondering if any AFers can share their interview experience for Private Equity FOF/Endowment role and have gone through any of the steps - from tech screening to personal to job offer. Curious to hear your perspective on things you were asked that led you to progress to next round or cut off and perhaps what you could have done to progress to next round.
Is the endowment role specifically in private equity fund selection? I’m not sure if I can give any useful interview advice, but I can probably give you some useful industry information. What’s your background - have you any relevant work experience?
For PE, I find AltAssets does a good round up of industry news. You might be able to get a free trial there I’m not sure.
If you have any specific questions about PE I might be able to help.
Carson, This role to best my knowledge is PE dedicated. I have experience in doing number of investment discussions, meetings and calls with PE principals, doing detailed position level due dilligence, evaluation of terms from legal perspective, performance reporting. I was curious if someone had gone through a similar interview process and was willing to share their experience. I really appreciate you stepping up and taking time to respond. What kind of role you are into right now?
I’ve been in a PE fund selection role at a small endowment for the last couple of years so pretty much exactly what you are interviewing for by the sounds of it.
From the looks of things you have a lot of good experience so you should be confident going into the interview.
The larger the FoF or endowment, the greater the levels of due diligence done as a general rule although in my opinion a lot of what goes on is superfluous and really about having a paper trail in place if anything does go wrong.
As well as standard interview questions to try to gauge your general experience levels and personality (‘fit’), I expect the position-specific questions might be something along the lines of ‘What steps would you take when performing manager due diligence?’ and ‘What are the most important items to be considered in DD?’ etc. Those are quite broad questions of course.
Off the top of my head, some points worth mentioning:
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Dispersion of manager returns is large for PE (VC > buyout) and hence it is important to try to select 1st quartile managers as much as possible. (side question - how come all managers claim to be 1st quartile? Good paper on that by Rudiger Stucke)
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Manager returns tend to persist in PE (again VC more so than PE) hence track record is a useful indicator when assessing a manager
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However, there is more to due diligence than simply looking at track record, even if in reality that is probably the most important factor in a successful GP fund raise. Given that anyone can just look at the track record, FoF’s love to boast about how good they are at assessing the ‘soft’ factors.
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When constructing a PE portfolio, one important point is to ensure that you invest consistently through the cycle. Most PE investors (including CALPERS and most major endowments) committed far more capital in 2006-2008 than in 2009-2011 despite the latter almost certainly being the better vintage period. Thus once you have decided how much you wish to invest in PE over the next number of years, you must build out a cashflow model to determine how much you wish to commit each year in order to reach your target invested amount in 2016,2017 etc. That is a tricky process as distributions can cease up suddenly as happened in 2009.
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Once you have decided on the amounts you wish to commit, you then use top down criteria to formulate the framework of the portfolio. So let’s say you want to be 70% US, 20% Europe and 10% ROW and also 60% buyout, 10% growth, 15% VC, 10% distress, 5% other. If you have decided to make 10 commitments each year then you can broadly determine how many managers in each category you need to commit to each year.
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After that comes the tricky bit: the bottom up manager selection. Ideally, you are trying to select 1st or 2nd quartile managers and hence create a better than average portfolio. In my honest opinion, once you create a PE program with 50+ managers and 100+ commitments you are so diversified that to beat the average by any meaningful way is effectively impossible. However, if you are a FoF with external clients you can’t really say that. So you talk about things like assessing team experience and turnover, quality and consistency of strategy, deal flow (m&a experience) and sourcing ability, value add after acquisition, risk assesment (includes leverage levels, historical loss rates etc), quality of back office systems and so on.
They may also ask you general industry question such as is there too much dry powder outstanding at the moment? Is the market too expensive? Should we be worried about the amount of covenant-lite financing going on? etc. Preqin is a good source for industry side data if you can access that.
Thanks so much Carson for sharing your insights. Manager dispersion, persistency of returns, consistency in investing across cycles are great points. I am also going to prep up on atleast 5 or more pe investments that we made. I found that investing terms were also crucial and to an extent negotiable. You have given me enough food of thought. I will also catch up all PE related material from level 2 & 3, to get my basics refreshed. Like equities you also have ineffeciencies and sectors of PE that trade relatively cheapely on EBITDA multiples. I am glad I posted here for feedback. I try to remind myself to be humble, ask the experienced, as there is always something to learn.
Hi. Glad I could be of some help.
You make a good point about fund terms being important and negotiable. The larger the commitment size, the more sway the LP has. Small fry like the firm I work for have to more or less take the headline fee rate. The large endowments that can do >$100m ticket sizes have much more bargaining power. You can see the effect of it in published returns. For large buyout fund A, you will often see that large endowment X has a return of 1.42x whereas small university Y will have a 1.37x mark for the same fund.
It appears that the class level, asset allocation are fairly static and mostly driven by institutional consultants if you can afford but their fees do take bite away from your returns. Our allocations.to PE is generally 3-6% of total portfolio. What allocations have you seen for some of defined benefit or endowment plans? Have you run into any disasters? One frequent problem we come across is marking of investments and timely reporting. It can be painful on occasions and a symptom of larger problems down the road.
Allocations to PE vary widely. Yale is over 30% I think. Most large university endowments in the US are in the 10% to 20% range from what I’ve seen. There are reports available that list industry averages but can’t find one to hand. At the other end of the spectrum, most sovereign wealth funds would tend to be much lower. Probably 0%-8% being typical. Private wealth clients are also typically in the single digit range for liquidity reasons.
As for disasters, I guess you mean really bad fund performance? I haven’t personally been involved in any funds commiting fraud etc but we do have some dogs in the portfolio. Not too many to be fair. Over the last 10 years, even 4th quartile funds can be marked above 1x depending on the vintage year. I think in VC you are more likely to see full on blow ups but thankfully I haven’t had to deal with that personally.
For performance, we just use the managers’ quarterly marks. That obviously understates true volatility. If you want to gauge that, you would need to factor in movements in the secondary market which is difficult. The simplest way would be to use the public market volatility and assume a figure a few percentage points greater than that to account for the increased leverage used in PE.
Carson, If you are at a DBP type of organization? How do you like it?
It appears that strategic asset class level, geographic and segment level allocation decisions are pretty much made. In some larger plans like the one that I am being considered for, there are also institutional consultants involved. So not much of a wiggle room to give any inputs on those aspect of portfolio construction.
Do you also work with institutional consultants? I have met with a few of them and I am not sure if they are very helpful in investment setting beyond their database and cover your aspect of decision making from organization perspective.
AI
I’m at a relatively small shop so get to give input in the higher levels decisions you mentioned. I have worked at larger institutions before and there are pluses and minuses. It’s hard to generalize but I would say that yes you are more likely to be pigeon-holed in a bigger firm into a more limiting role. On the other hand, pay caps out at a lower level in small firms all else equal (again speaking in very general terms).
And even in the larger public pension funds I’ve spoken to, they tend to have a pretty small team running their private assets portfolio. Probably <10 people in total is common. So I would have thought you would get some input into the portfolio construction side of things even if your day-to-day job is mostly in manager selection.
We have a good relationship with one large consultancy firm. Works well and we’re happy with it. They also run an in-house fund-of-funds business (and do some directs too) which helps as they are effectively looking at things in the same way we are. I think 3rd party consultants are most useful for adding another layer of due diligence and also for pre-screening managers in a particular segment down to a manageable number of names.
Carson - Thanks a lot. That was very helpful!