position at PE fund. how much is carry really worth? Forum

[Anonymous User]

ive got an offer at a PE fund. i love the people, the fund, everything about it... but the pay is weird. base is quite a bit lower than what i currently make in biglaw, but i would get "1% carry." what would this mean for me on a practical basis and when could I expect the money to hit?

sorry for the stupid question, but i feel like this is shrouded in mystery...

[thatsnotmyname]

It typically takes years to get carried interest as an LP in a PE fund. You won't ever get anything if the portfolio companies that the fund has invested in are unsuccessful, so it would be a good idea to get a clear picture of this PE firm's track record. You'll have to make a capital commitment to the fund initially as well to become an LP in the fund and you'll have to continue to contribute in accordance with the LPA whenever there is a capital call. So you're essentially buying into the portfolio companies that the fund has invested in and trusting that the management company is doing a good job of increasing the value of the portfolio companies. You'll only get paid once management has increased the value of the portfolio company enough to make a satisfactory rate of return on their investment... so basically you'll only get paid carry once management has successfully sold one of their investments. PE funds typically invest long, meaning that they aren't really looking to exit sooner than 3 years and can hang onto their portfolio companies for a really long time.

But anyways, the carry can be a lot of money if the PE firm invested well and did a good job of increasing the value of the portfolio company, but even if they do a good job it will probably be at least 3 years before you see any carry.


http://en.wikipedia.org/wiki/Carried_interest

[Anonymous User]

It typically takes years to get carried interest as an LP in a PE fund. You won't ever get anything if the portfolio companies that the fund has invested in are unsuccessful, so it would be a good idea to get a clear picture of this PE firm's track record. You'll have to make a capital commitment to the fund initially as well to become an LP in the fund and you'll have to continue to contribute in accordance with the LPA whenever there is a capital call. So you're essentially buying into the portfolio companies that the fund has invested in and trusting that the management company is doing a good job of increasing the value of the portfolio companies. You'll only get paid once management has increased the value of the portfolio company enough to make a satisfactory rate of return on their investment... so basically you'll only get paid carry once management has successfully sold one of their investments. PE funds typically invest long, meaning that they aren't really looking to exit sooner than 3 years and can hang onto their portfolio companies for a really long time.

But anyways, the carry can be a lot of money if the PE firm invested well and did a good job of increasing the value of the portfolio company, but even if they do a good job it will probably be at least 3 years before you see any carry.


http://en.wikipedia.org/wiki/Carried_interest

just what i was looking for. thanks. for a middle market PE fund, am i looking at a substantial amount of money thru carry (at least enough to make up for the paycut?)? assume the fund does very well generally.

[thatsnotmyname]

It typically takes years to get carried interest as an LP in a PE fund. You won't ever get anything if the portfolio companies that the fund has invested in are unsuccessful, so it would be a good idea to get a clear picture of this PE firm's track record. You'll have to make a capital commitment to the fund initially as well to become an LP in the fund and you'll have to continue to contribute in accordance with the LPA whenever there is a capital call. So you're essentially buying into the portfolio companies that the fund has invested in and trusting that the management company is doing a good job of increasing the value of the portfolio companies. You'll only get paid once management has increased the value of the portfolio company enough to make a satisfactory rate of return on their investment... so basically you'll only get paid carry once management has successfully sold one of their investments. PE funds typically invest long, meaning that they aren't really looking to exit sooner than 3 years and can hang onto their portfolio companies for a really long time.

But anyways, the carry can be a lot of money if the PE firm invested well and did a good job of increasing the value of the portfolio company, but even if they do a good job it will probably be at least 3 years before you see any carry.


http://en.wikipedia.org/wiki/Carried_interest

just what i was looking for. thanks. for a middle market PE fund, am i looking at a substantial amount of money thru carry (at least enough to make up for the paycut?)? assume the fund does very well generally.

It's tough to be able to say without knowing how successful the investment is. But hypothetically, if they do very well you could get paid out hundreds of thousands of dollars when they sell the portfolio company and it would more than make up for whatever compensation differential you're seeing. But it's important to keep in mind that it's difficult to predict the amount and timing of the carry. You might be working there for four years and not get any carry. I think it's a fairly risky pay structure that could pay out in spades or just end up being worthless. I don't really have any personal experience with this compensation structure, so it would be interesting to hear from someone who has.

[Internetdan]

It typically takes years to get carried interest as an LP in a PE fund. You won't ever get anything if the portfolio companies that the fund has invested in are unsuccessful, so it would be a good idea to get a clear picture of this PE firm's track record. You'll have to make a capital commitment to the fund initially as well to become an LP in the fund and you'll have to continue to contribute in accordance with the LPA whenever there is a capital call. So you're essentially buying into the portfolio companies that the fund has invested in and trusting that the management company is doing a good job of increasing the value of the portfolio companies. You'll only get paid once management has increased the value of the portfolio company enough to make a satisfactory rate of return on their investment... so basically you'll only get paid carry once management has successfully sold one of their investments. PE funds typically invest long, meaning that they aren't really looking to exit sooner than 3 years and can hang onto their portfolio companies for a really long time.

But anyways, the carry can be a lot of money if the PE firm invested well and did a good job of increasing the value of the portfolio company, but even if they do a good job it will probably be at least 3 years before you see any carry.


<a rel="nofollow" href="http://en.wikipedia.org/wiki/Carried_interest[/quote" class="vglnk"><span>http</span><span>://</span><span>en</span><span>.</span><span>wikipedia</span><span>.</span><span>org</span><span>/</span><span>wiki</span><span>/</span><span>Carried</span><span>_</span><span>interest</span><span>[/</span><span>quote</span></a>]

just what i was looking for. thanks. for a middle market PE fund, am i looking at a substantial amount of money thru carry (at least enough to make up for the paycut?)? assume the fund does very well generally.

Middle market can mean a lot of different things. Assuming $100mm, then 1% of that, taxed at capital gains tax bracket

[thatsnotmyname]

It typically takes years to get carried interest as an LP in a PE fund. You won't ever get anything if the portfolio companies that the fund has invested in are unsuccessful, so it would be a good idea to get a clear picture of this PE firm's track record. You'll have to make a capital commitment to the fund initially as well to become an LP in the fund and you'll have to continue to contribute in accordance with the LPA whenever there is a capital call. So you're essentially buying into the portfolio companies that the fund has invested in and trusting that the management company is doing a good job of increasing the value of the portfolio companies. You'll only get paid once management has increased the value of the portfolio company enough to make a satisfactory rate of return on their investment... so basically you'll only get paid carry once management has successfully sold one of their investments. PE funds typically invest long, meaning that they aren't really looking to exit sooner than 3 years and can hang onto their portfolio companies for a really long time.

But anyways, the carry can be a lot of money if the PE firm invested well and did a good job of increasing the value of the portfolio company, but even if they do a good job it will probably be at least 3 years before you see any carry.


<a rel="nofollow" href="http://en.wikipedia.org/wiki/Carried_interest[/quote" class="vglnk"><span>http</span><span>://</span><span>en</span><span>.</span><span>wikipedia</span><span>.</span><span>org</span><span>/</span><span>wiki</span><span>/</span><span>Carried</span><span>_</span><span>interest</span><span>[/</span><span>quote</span></a>]

just what i was looking for. thanks. for a middle market PE fund, am i looking at a substantial amount of money thru carry (at least enough to make up for the paycut?)? assume the fund does very well generally.

Middle market can mean a lot of different things. Assuming $100mm, then 1% of that, taxed at capital gains tax bracket

Assuming what is $100 million? You're taking 1% of what? Carry is not really a straightforward calc. You really have to read the LPA to be able to understand how the carry will be distributed.

[Lawyerrr]

Are you working in a business role or in-house? Just curious. That's awesome they're giving you carry right up front. At most places, you have to work several years to get carry.

Others can correct me if I'm wrong but I think you only get carry after the fund passes the hurdle rate (usually 8%). How much you get can be substantial.

[Anonymous User]

I am sure you are familiar with the typical 2/20 compensation structure of PE funds generally. To determine what the 1% figure amounts to, several questions must be answered. Among others: what is the size of the fund and what is the return over the holding period. In estimating carry, most assume that the fund returns 2x. Thus, for a fund with AUM of $250 million, the profit is estimated to be $250 M, leaving $500 M total. The fund is compensated by receiving 20% of the profit - $50 M in the example above. It is not clear whether your 1% figure is 1/20 or 1/100 (i.e. 5% of profit or 1% of profit). Using the example above, this would be between $2.5M and $500k. The former is more likely, given typical carry for VPs at PE funds.

P.S. Would be interested to know a bit about AUM, how many years into biglaw you are, the position title you have been offered, your prospective job responsibilities, etc.

Hope this helps.

[Clearly]

I know nothing about this, but for some psychological reason, the fact that the number is only 1% and they still offer it makes it sound like a lot.

[Anonymous User]

The way I've typically seen carry quoted is as a % of the GP's portion (e.g. the 20% of returns)

For example, if you're at a $1Bn fund that returns 2x in five years (which is conservative - a fund of that size would probably target a 3x+ return), you'll have $1Bn of gains that the PE fund and the LPs would split after returning the initial invested capital. In a typical 2/20 structure the PE fund gets $200MM of that, meaning 1% carry is worth ~$2MM over the life of the fund.

It's important to note that this isn't going to be a steady stream of income or a lump sum - you'll get paid out as capital is returned, and this can be an irregular and drawn out process. As with any investment it's not guaranteed and if your fund doesn't meet its hurdle rate your carry could be worth nothing. On the other hand though, if your fund does well you could be raking it in (and you get to enjoy that capital gains tax rate too)

[Lawyerrr]

The way I've typically seen carry quoted is as a % of the GP's portion (e.g. the 20% of returns)

For example, if you're at a $1Bn fund that returns 2x in five years (which is conservative - a fund of that size would probably target a 3x+ return), you'll have $1Bn of gains that the PE fund and the LPs would split after returning the initial invested capital. In a typical 2/20 structure the PE fund gets $200MM of that, meaning 1% carry is worth ~$2MM over the life of the fund.

It's important to note that this isn't going to be a steady stream of income or a lump sum - you'll get paid out as capital is returned, and this can be an irregular and drawn out process. As with any investment it's not guaranteed and if your fund doesn't meet its hurdle rate your carry could be worth nothing. On the other hand though, if your fund does well you could be raking it in (and you get to enjoy that capital gains tax rate too)

Isn't it 20% of the profits that exceed the hurtle rate--not 20% of total profits?

[Anonymous User]

The way I've typically seen carry quoted is as a % of the GP's portion (e.g. the 20% of returns)

For example, if you're at a $1Bn fund that returns 2x in five years (which is conservative - a fund of that size would probably target a 3x+ return), you'll have $1Bn of gains that the PE fund and the LPs would split after returning the initial invested capital. In a typical 2/20 structure the PE fund gets $200MM of that, meaning 1% carry is worth ~$2MM over the life of the fund.

It's important to note that this isn't going to be a steady stream of income or a lump sum - you'll get paid out as capital is returned, and this can be an irregular and drawn out process. As with any investment it's not guaranteed and if your fund doesn't meet its hurdle rate your carry could be worth nothing. On the other hand though, if your fund does well you could be raking it in (and you get to enjoy that capital gains tax rate too)

Isn't it 20% of the profits that exceed the hurtle rate--not 20% of total profits?

It's usually 20% of profits. The way I've seen it structured is that the LP receives all the gains until you meet the hurdle rate, before the GP has a "catch up period" to get to its 20%. For example, if a fund has an 8% hurdle rate, the LPs will get all of the gains until they reach that level. Then the GP will get everything that comes after that until its gets to its return. Following that, everything is split 80/20

[nonsharepartner]

ive got an offer at a PE fund. i love the people, the fund, everything about it... but the pay is weird. base is quite a bit lower than what i currently make in biglaw, but i would get "1% carry." what would this mean for me on a practical basis and when could I expect the money to hit?

sorry for the stupid question, but i feel like this is shrouded in mystery...

Did you do PE and funds work before? Sounds like maybe not. But just asking because I am curious how you found the position (seems really cool).

[2014]

Out of curiosity do you give up your accrued but unpaid cut if you leave the fund?

[Anonymous User]

The way I've typically seen carry quoted is as a % of the GP's portion (e.g. the 20% of returns)

For example, if you're at a $1Bn fund that returns 2x in five years (which is conservative - a fund of that size would probably target a 3x+ return), you'll have $1Bn of gains that the PE fund and the LPs would split after returning the initial invested capital. In a typical 2/20 structure the PE fund gets $200MM of that, meaning 1% carry is worth ~$2MM over the life of the fund.

It's important to note that this isn't going to be a steady stream of income or a lump sum - you'll get paid out as capital is returned, and this can be an irregular and drawn out process. As with any investment it's not guaranteed and if your fund doesn't meet its hurdle rate your carry could be worth nothing. On the other hand though, if your fund does well you could be raking it in (and you get to enjoy that capital gains tax rate too)

Isn't it 20% of the profits that exceed the hurtle rate--not 20% of total profits?

It's usually 20% of profits. The way I've seen it structured is that the LP receives all the gains until you meet the hurdle rate, before the GP has a "catch up period" to get to its 20%. For example, if a fund has an 8% hurdle rate, the LPs will get all of the gains until they reach that level. Then the GP will get everything that comes after that until its gets to its return. Following that, everything is split 80/20

Yeah, this should be the correct view. While GP gets nothing until you exceed the hurdle rate, the catch up period should mean that the GP still ends up with 20% of profits. Obviously, this wouldn't be the case if the fund returns were insufficient for the GP to "catch up."

[Anonymous User]

Very interested in the type of law OP is currently practicing that may or may not have helped him get that offer.

[Anonymous User]

You'll have to make a capital commitment to the fund initially as well to become an LP in the fund and you'll have to continue to contribute in accordance with the LPA whenever there is a capital call. t

This is not necessarily true. I have carried interest in the fund I work for (as do a number of other people) and none of us have put in capital. Being given carry awards is just part of our compensation package

[unlicensedpotato]

ive got an offer at a PE fund. i love the people, the fund, everything about it... but the pay is weird. base is quite a bit lower than what i currently make in biglaw, but i would get "1% carry." what would this mean for me on a practical basis and when could I expect the money to hit?

sorry for the stupid question, but i feel like this is shrouded in mystery...

Did you do PE and funds work before? Sounds like maybe not. But just asking because I am curious how you found the position (seems really cool).

Yeah, what? No offense, but how do you get a position like this if you can't explain what carried interest is?

[nonsharepartner]

ive got an offer at a PE fund. i love the people, the fund, everything about it... but the pay is weird. base is quite a bit lower than what i currently make in biglaw, but i would get "1% carry." what would this mean for me on a practical basis and when could I expect the money to hit?

sorry for the stupid question, but i feel like this is shrouded in mystery...

Did you do PE and funds work before? Sounds like maybe not. But just asking because I am curious how you found the position (seems really cool).

Yeah, what? No offense, but how do you get a position like this if you can't explain what carried interest is?

My point exactly, just more direct. Most of the PE associates here could write an essay on carried interest...