Different VC/PE Model – Interesting Concept

Recently, I had drinks with a long-time friend who is an ex-banker that has switched over to the buy-side (more like PE than VC). He’s focused on distressed assets that have revenue and fit a pretty loose investment theme in the tech space.

What I found most interesting was the model for the firm, investments, and how everyone was paid. In particular, he didn’t raise a typical “fund.” Instead, he has a pool of limited partners who all opt-in or out of particular deals in what seems to be a very efficient manner.  He has the ability to put $1m – $100m per deal to work – which is a pretty tremendous range.  More interesting is that, because there is no traditional fund, there is no traditional 2% management fee on top of that fund. He gets paid in 3 ways: a transaction fee (small, per successful deal); a management fee (like a salary) PAID BY THE TARGET COMPANIES; and a nice per-deal carry.

I really like this model because it drives great behavior: the companies get longer-term, focused help from the folks at the firm; the limiteds must buy-in on each deal and aren’t paying management fees 24x7x365; the folks running the firm are paid only for deals that get done and are driven almost exclusively by the carry than the low-activity-accommodating management fee structure. And there’s little to no fund raising if you keep your limiteds happy which is a nice incentive.

I find the model very interesting; I’ve heard of fundless equity before — firms or individuals who source & vet deals without a pool (fund) of committed capital where financial sponsors (the limited partners) are pulled together on a deal-by-deal basis. But this is different still..and with sufficient detail to imagine how the economics differed from traditional firms.


One Response

  1. Interesting. Does “paid by the target companies” have anything to do with “focused on distressed assets”? I’ve never thought about investors being compensated by investees – feels a little weird, but not necessarily bad.

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