I almost fell off the chair when a friend shared his number (for retirement) with me. I applaud his ambition but this little boy (i.e. me) from the cornfields has never seen that many zeroes before. Let’s start with a quote from Jeff Bezo’s final shareholder letter
“If you want to be successful in business (in life, actually), you have to create more than you consume. Your goal should be to create value for everyone you interact with. Any business that doesn’t create value for those it touches, even if it appears successful on the surface, isn’t long for this world. It’s on the way out.”
To achieve $100mm in net worth, he’s going to have to create a ton of value so I’m excited to watch his journey. This conversation made me think about the ingredients necessary in the fund business to build that kind of wealth.
$100mm (Our Objective) = (a) Capital Deployed ($) x (b) (Multiple on Invested Capital (x) - 1) x (c) Carried Interest (%) x (d) Ownership of Partnership (%) x (e) (1 - Capital Gains Tax) (%)
I’m sure most of ya’ll are familiar with the above but for everyone else
(a) Capital Deployed ($): Size of capital deployed against opportunity set
(b) Multiple on Invested Capital (x): Return generated relative to fund investment
(c) Carried Interest (%): Firm’s incentive compensation for fund managers
(d) Ownership of Partnership (%): Individual’s portion of the firm’s incentive compensation
(e) (1 — Capital Gains Tax) (%): After Tax Return
Let’s just put numbers to each as to what is known:
(b) Multiple on Invested Capital (x): Return generated relative to investment but most funds generate between 1.5x — 2.0x net MOIC
(c) Carried Interest (%): Typically 15.0% — 20.0% for most vehicles
(e) (1 — Capital Gains Tax) (%): Sorry for all the future fund managers, but you’re likely in New York (54.3%) or California (56.7%) so 45.7% and 43.3% respectively
I’ll pick the conservative items 1.5x for (b), 15.0% for (c) and then utilize an extreme example (100%) for (d). You’ll likely need a team to achieve your goal…
$100mm (Our Objective) / (b) (1.5x — 1.0x) / © 15.0% /
(d) 100% / (e) (1–56.7% [Assuming CA]) = (a) approx. $3.0bn Capital Deployed
Even if we are aggressive and use 2.0x for (b), 20.0% for (c). The number is still relatively large
$100mm (Our Objective) / (b) (2.0x — 1.0x) / © 20.0% /
(d) 100% / (e) (1–56.7% [Assuming CA]) = (a) approx. $1.2bn Capital Deployed
I’m sure this conversation is more existential, but what do you aspire to become? A return generator (multiples of invested capital) or an asset manager (paid on assets gathered), neither is right or wrong — it’s just a choice. The adage goes, “if you want to go fast, go alone; if you want to go far, go together”. I think of going fast as opportunistically being a return generator (likely requisite that you have a small denominator) and going far as building an institution (one that has the scale to build the necessary infrastructure). Obviously, they are not mutually exclusive.
To my friend, God speed in your journey — I’m excited to watch your journey!
