There's a new breed of funds emerging in the world of private equity over the last several years. They're being created by the founders and partners of earlier, larger successful funds — often in conjunction with founders of successful companies that once received private equity funding to grow. Known as founder funds, these new private equity funds are being conceived by people with vast amounts of experience on both sides of private equity investing, enabling them to bring a unique perspective to the different investments they make to form a new fund. They've seen successes and failures in the past, and they use their personal histories to help them make informed decisions. It's an interesting philosophy on which to build a private equity fund, and its popularity is growing.
This type of investment refers to a situation when a secondary buyer purchases a share in a private equity fund (indirect), or a stake in private equity-owned company (direct) from a seller, such as an existing limited partner (LP). Typically this requires general partner (GP) consent, and can be visualized as follows:
The term "founder fund" isn't exactly new — it has been used for years and years to describe the notion of a startup or young company being self-funded by its founder to enable it to reach a certain point of growth before outside investments are brought in to take it to the next level. In the world of private equity, the basic definition remains intact — it's just being applied to a different kind of startup. Partners of earlier, successful funds and founders of now-successful companies that once relied on private equity funding are taking the wealth they've accrued through their past successes and using it to create their own funds.
A great example of this is literally called Founders Fund. With partners like Peter Thiel, Ken Howery and Brian Singerman, this private equity fund was created by people who cut their teeth as founders, investors and employees at companies such as SpaceX, Google and PayPal. As of 2016, Founders Fund raised its sixth fund — a $1.3 billion fund that brought the firms aggregate capital under management to more than $3 billion.
Many of the respected founder funds out there, such as Luminate Capital (founded by ex-Silver Lake Sumeru co-founder, Hollie Haynes, and former CEO of Radiant Systems, John Heyman), create funds that are more diversified across a variety of sectors, stages and/or geographies. They tend to look toward companies that are past the startup phase of development — companies whose potential has already been proven and are simply ready for new growth opportunities.
Founder funds help inject capital into up-and-coming companies with the ultimate goal of acquiring a majority ownership — this way, they can work with those companies' management to further strategy and overall operations. In doing so, the funds they raise are backed by investments in more established companies, minimizing the funds' risk.
Founder funds are built by people with deep experience in private equity investment, and their expertise should lead them to understand the value and importance of mid and back office software that helps funds scale. Fund admins that are tech-savvy are great examples, because they can offer scaling services at a reasonable rate, or "fund in a box" type solutions. There are a wide variety of expenses and compliance that needs constant attention, and a highly intuitive expense software can help them manage their funds' expenses with greater ease and accuracy. By employing a software like this, founder funds can save themselves time, money and frustration; at the same time, they can focus more of their attention on the growth and success of their fund.
If expense allocation software (or spend management software) could help your firm, get in touch with us or find out more:
Gary R Markham
Gary R Markham is co-founder and Chief Executive of aXpire fund solutions, which designs, develops and deploys an array of expense management tools. He is an author of many articles, regularly speaks at conferences, panels and symposiums, a Global Director of the Hedge Fund Association, a recent recipient of the Keys to the County of Miami Dade. Gary has over 20 years experience in FinTech, specializing in spend, expense management, vendor and allocation and apportionment software solutions.