Friday Letter: Appetite for creation

History does not repeat itself, but it can act as a guide as to what to expect.

As one investor said to PrivateEquityOnline.com this week, if you look at what happened in the US in the past then it would be reasonable to expect the same to happen in Europe. He was talking about the soft launch of Toby Wyles’s super group of former senior executives from Apax and BC Partners.

He said there was a generation of managers in the “marzipan layer” that lies between the managing partners, the icing on the cake, and the cake itself, which was tired of missing out on the cherry. The managing partners, except in the most democratic of firms, take the lion’s share of the carried interest.

And in a good many firms those founding, managing partners are not going anywhere fast. Look at Kohlberg Kravis Roberts, The Blackstone Group and others. The key men appear to be some way off moving aside for the next generation.

The only way to enjoy the enhanced economics that come from being at the very peak of a firm is to start your own. As a generation of US managers has already discovered.

In Europe that has been a rather more piecemeal phenomenon. Dominic Shorthouse left Warburg Pincus to found Englefield Capital. Graham Hutton and Matthew Collins created the eponymous mezzanine manager after careers in banking. Harald Mix founded Altor after years at Industri Kapital. There are others but not many.

Will Wyles’s new group help unlock the ambition of a generation? Probably not. One fund of funds manager said Wyles’s super group was hardly a surprise. What had shocked the industry was how long it took. He said the industry had underestimated the impact the standstill period these executives would have to see out.

It has been almost two years before Wyles has been able to go back to investors for a fund that in most instances will not take him into competition with his old employer.

That is quite a gamble for any managers looking to emulate Wyles and his team, which the source said had less to lose in jumping ship in 2003.

The source argued Wyles’s team would have just begun in 2003 to see the returns from funds they had invested at the peak of the TMT boom and they were probably not worth hanging around for. Better to strike out alone despite the obvious difficulties that would entail.

Not least the investor resistance to debut funds. “They are creative deal doers, no doubt, but do they have the attention to detail you need to run your own fund?” the source asked.

If Wyles succeeds, he and his team will have earned the money. No one has ever said this was an easy or quick way to get rich. But the incentives are there. Investors are hungry. How hungry are you?