11/2/11

Hi

I have a PE job offer for an investment analyst role -- the fund has only two functional roles: investment analyst and fund manager.

1st fund $120mm (80% investments are done), starting a 2nd fund $250mm (70% capital raised).

Part of my compensation is carry. I was told that in order to get carry I will have to contribute some amount of money or buy in the carry pool. Since this is my first PE job offer, am not sure whether this is strange or industry standard.

I would really appreciate if people on this forum can provide some insight into this.

Thanks.

Comments (11)

11/2/11

It is not strange, nor is it industry standard per se. You have an incredible opportunity here; being at a small fund like this means you got the chance to get carry. That never happens at such a junior level at larger funds. This is not a "have to," this is a "get to" situation.

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11/2/11
A Posse Ad Esse:

It is not strange, nor is it industry standard per se. You have an incredible opportunity here; being at a small fund like this means you got the chance to get carry. That never happens at such a junior level at larger funds. This is not a "have to," this is a "get to" situation.

Thanks -- appreciate your input

11/2/11

Congrats, these types of roles position you best (relative to a junior role in a megafund) to make a boatload of money at an early age should one of your investments (and funds) do extremely well. What amount are they looking for you to invest? I have seen anywhere from 25k up to several million depending on fund size and other factors.

11/2/11

It isn't completely unusual at a small firm for them to require you contribute to the fund in order to earn "carry", but i can tell you it most definitely is not the norm. I would absolutely give them a call and ask them how the economics work because what you're describing sounds more like a co-invest than carry.

The vast majority of PE shops keep 20% of the profits as their carry pool. So if the fund size is $100mm and upon exit of all investments, it earns $200mm, then the $100mm profit x 20% = $20mm ---> is the carry pool. The employees of the PE fund earn the $20mm regardless of whether anyone personally invests in the fund and this amount is divvied up based on however the managing partners see fit. This is important because no one's personal wealth is at risk to earn carry (unless there's a clawback of previous payouts due to losing investments). In the example above, if I had 1% carry, I would've made $200K off of my carried interest.

If you are required to invest your own personal money to earn carry, what you're really doing is co-investing. Many PE firms have a small part of the fund set aside for co-invest, for example a $100mm fund could be split $95mm LP and $5mm co-invest. If you do happen to be a part of the co-invest, then the payout is different from carry. Using the same example above, if you co-invest $100K into a $100mm fund that earns $200mm, then you get a 2x return which means your $100k should return $200k to you (being really simplistic across all examples and not factoring in transaction fees, management fee payback, etc).

If they require you to "buy into" the carry pool, it may be some sort of hybrid between the two, but I would definitely try to find out some more because with your own personal capital at risk, the payout is hopefully better than the return on vanilla carried interest.

Best Response
11/2/11

While a number of the reputable posters above have weighed in, I would like to say that the structure being offered to you isn't all that rare. Building off what PEguy2011 said:

Often times the General Partners (investment professionals) will be required to put up a portion of the capital for the fund -- essentially acting in a Limited Partner capacity. This usually amounts to a few percentage points of the total fund size. For example, if the fund were $100 million, the General Partners may be required to contribute $2 million or 2% of the capital. The General Partners then must determine how that $2 million is ultimately split amongst themselves. It would not be abnormal for the $2 million to be split based on everyone's pro rata share of the carry. For example, if one partner had 10% of the carry, he would be responsible for $200k or 10% of the $2 million.

I believe that the fund you're joining has a similar structure. By granting you carry, they will also expect you to put up your pro rata share of General Partners' investment in the fund. Because your carry will be a very small percentage, you won't have much capital at risk. If they grant you 1.0% in the above example, you're only responsible for 1% of 2% of the fund, or $20k. You will be expected to essentially write a check every time capital is called from the fund to pay expenses or fund an investment. Similarly, every time there is a capital distribution to the Limited Partners, you will get your pro rata share (1% of the 2%).

Overall -- don't be scared of this structure. They are essentially offering you the chance to participate as a Limited Partner, albeit on a very small scale. If the fund doubles in size, you will not only be paid double the amount you're paying into the fund, but you'll also receive your carried interest.

CompBanker

11/5/11
CompBanker:

While a number of the reputable posters above have weighed in, I would like to say that the structure being offered to you isn't all that rare. Building off what PEguy2011 said:

Often times the General Partners (investment professionals) will be required to put up a portion of the capital for the fund -- essentially acting in a Limited Partner capacity. This usually amounts to a few percentage points of the total fund size. For example, if the fund were $100 million, the General Partners may be required to contribute $2 million or 2% of the capital. The General Partners then must determine how that $2 million is ultimately split amongst themselves. It would not be abnormal for the $2 million to be split based on everyone's pro rata share of the carry. For example, if one partner had 10% of the carry, he would be responsible for $200k or 10% of the $2 million.

I believe that the fund you're joining has a similar structure. By granting you carry, they will also expect you to put up your pro rata share of General Partners' investment in the fund. Because your carry will be a very small percentage, you won't have much capital at risk. If they grant you 1.0% in the above example, you're only responsible for 1% of 2% of the fund, or $20k. You will be expected to essentially write a check every time capital is called from the fund to pay expenses or fund an investment. Similarly, every time there is a capital distribution to the Limited Partners, you will get your pro rata share (1% of the 2%).

Overall -- don't be scared of this structure. They are essentially offering you the chance to participate as a Limited Partner, albeit on a very small scale. If the fund doubles in size, you will not only be paid double the amount you're paying into the fund, but you'll also receive your carried interest.

First post ever for me. CompBanker, I sent you a pm about a week ago. Please let me know if it was too detailed or something?

What do you think of the megafunds since they have gone public and with having to come up with more predictable revenue streams (perhaps the reason some are branching out to include trading/capital markets groups), how different do you think future prospects are for building a career at one of these (KKR/BX/TPG/Carlyle).

To me personally, I found them much more appealing before they went public (could potentially change compensation/pay as they're in more of the public spotlight).

Also, I'm in Sydney, Australia and hoping to come across to NY/London at some stage...the recruiting here (From what I have seen/heard from older bankers) regarding PE is virtually non existant with the megafunds as they have really small operations so would only hire on recommendations strictly.

Just wanted to apologise in the future regarding my spelling/grammar since in Australia we write a little differently!

Thanks for all your responses in advance, really love this site.

"It's all about bucks kid. The rest is conversation."

11/17/11
YoungGekko:

Just wanted to apologise in the future regarding my spelling/grammar since in Australia we write a little differently!

Don't dare apologise. Your spelling is a lot closer to English than what Americans despicably refer to as 'English'.

11/3/11

GP commitment and indeed junior employee commitment is normal. It demonstrates alignment of interest with LPs.

Whilst it is predominantly necessary for Principals and above it is not unsual for everyone who will be getting carry to invest - either through the normal pool (with fees) or in a parrallel vehicle (without fees).

Some GPs will actually borrow money to bring their stake in line with expectations.

End of the day, carry is God.

11/3/11

post deleted--duplicate

11/13/11

Thanks all -- really appreciate your insight.

11/19/11
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