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.