Phantom Carry
I have an offer with a phantom carry component and am wondering if you guys could help me with comparing it against another offer that has a slightly higher comp but no phantom carry.
Basically I'm able to invest up to $25k in any deal that my firm does, and the firm puts in 3x my investment in non-recourse loans, so my effective investment becomes $100k. I get a payout when the deal is exited.
The firm has managed to flip several deals in a few years with a 2-3x multiple, which means that I could make a solid 4x-8x my initial investment in a couple of years. But obviously I could still lose my equity, so how should I value this against another offer that pays roughly $30k more per year?
Without knowing anything about you (i.e. your risk aversion, current net worth, liquidity, work experience, career goals, etc.) or the places you received offers from how could anyone possible provide you with any valuable insight? These questions are retarded. I always go where I have actual skin in the game rather than being just a salaried/bonus employee. Be an owner; take some risk.
I was only asking for a like-for-like compensation comparison, so knowing my work experience or the places I got offers from is irrelevant, though for the record the firms are on par reputation-wise. Also looking to stay long-term at the firm I choose. Regarding net worth, liquidity etc, let's just say my base+bonus comp is at a level that provides enough liquidity to invest, and am also comfortable enough with the risk to do so (frankly I'd say you'd have to be incredibly risk-averse not to invest, given that you'd be getting an outsized upside with only equity downside).
But perhaps I should have phrased the question differently (which, granted, you already answered): If you could choose between getting a 30k bump in total comp vs this phantom carry option at your PE firm (or prospective PE firm), which would you rather have?
Stupid question from non-finance professional: 25k investment, 75k phantom match. 100k total investment, 100% return when they cash out - you get 125K?
This is effectively a rolling retention bonus. If you leave before they cash out they won't give you the phantom returns, right?
I'd do it. That's game changer money early in life - but I'd plan on being there 5 years+.
Yeah, assuming 2x return, I'd be netting 100k (125k - 25k I invested).
If I leave before the end of my current contract the loans become recourse loans, so if the deal goes bust I have to repay them. Otherwise the arrangement stays the same, so I'd still get the returns.
Do you like golden handcuffs or not? That's what it boils down to. I don't know if it's $30K more in salary from $100K or $750K, obviously in one scenario it's more important than the other.
If I took the job that multiplies your investment, I wouldn't invest in any deals for the first year or so....you may end up hating these guys and want to leave, but can't because of the loans. Imagine if you have invested $300K over the next few years with them and then they lever that up to $1.2 million. Would you have to cough up $900K when you leave or only if a deal goes bust? If it's when you leave, I would be very leery about investing too much with them anyway. The other problem is going to be that your comp and investments will move in perfect tandem, since your comp is dependent on making successful investments.
If I quit, I'd be liable for any losses in the deals, so I'd have to cough up the loans only if the deals go bad. If I stay, they're non-recourse loans so if a deal goes bust I only lose the equity and the loan is written off.
If you leave are you liable for the loans or not (i.e. are the loans fully non-recourse, or only non-recourse for the time you are there)?
If you are liable for losses on the loans, it think it is a bad situation to be in. In effect, it's a form of debt peonage and I wonder if it is legal. Tell them you'll only do it if the loans are always non-recourse to you.
If you aren't liable for losses on the loans and the loans are non-recourse then you should value your co-investment at par, i.e. the $25k is $25k. The returns will be random, the loans just amplify them.
If you do decide to take the offer and end up co-investing, then you should save more money in cash for your personal account than you would do otherwise. You're taking on a lot of market & specific risk.
They'll be non-recourse. I have phantom carry and consider it a real perk of the job (I'm at a PE FoF).
It's a really good way for senior management to align the interests of junior employees with the long term success of the Funds.
Yeah, they're non-recourse unless I quit before my contract ends.
Let me get this straight, if you quit your job and the portfolio companies also go bankrupt you're on the hook for 3x your investment?!
Sounds like a shitty arrangement to be honest.
Interesting. I have seen the recourse structure in the past but I am more familiar with the concept whereby a shop allows you to co-invest and/or participate in the carry without having to participate in any future capital calls or recourse events should deals go sour. You would vest over the contract period, to the extent that you up and left on your own you would forfeit the unvested portion of your equity, to the extent that you were let go without cause, you would fully vest upon termination and be offered a payout or a chance to roll. Interested to hear others experience on this given the fact that this is where all the money is on the buyside.
How big are the investment targets? If you're talking about lower middle market deals vs. mega deals, I would much rather invest alongside the lower middle market deals due to the fact that the returns can be much higher. Every 1x multiple = an extra $100k... Sounds like a good deal to me.
junkbondswap,
What you describe is similar to what we had at a previous firm (non-American REPE firm) in terms of leveraged co-investment (optional on a deal by deal basis, non-recourse leverage). For carry/options, they vest over time, and the amounts that vest are yours whether you leave or not (also, non-US firm).
For actual GP participation (for Principals/Senior folks), i think capital calls are expected for every deal the fund does, but that there is dilution if you are unable to invest rather than recourse to you as an employee/individual. This is what i have seen from an REPE fund that was being set up at a previous firm.
Would love to hear what other people have seen at their firms or at funds that they have been involved with.
Do you get phantom carry? (Originally Posted: 02/02/2015)
If so, how much and how is it structured? I hear that it is becoming more popular at the analyst and associate levels... although it seems like the details (i.e. payout period, vesting, tax implications) could vary a lot.
Mine is called phantom equity. I just get cash payments at the end of the year equal to the levered returns of the constituent funds.
There is no vesting and it is treated as ordinary income. Pays out at FYE
This is a credit/distressed fund. I get the levered returns on 2 CLOs and a distressed/long/short fund. Not telling you how much I got, but it was granted to me a few months after joining.
I get phantom carry as an associate, 0.1%
How big is the fund? 10 basis points in a 5 billion dollar fund arguably are more valuable than 100 basis points in a 100mm fund.
I just did some really simple sensitivities and this turns out to be an insane amount of money for any fund of reasonable size.
We run about $1.5B, most of which is CLOs. We have 7 investment professionals
Also, based on this thread, I'm totally asking for at least a 10bps carry if I move to a new fund this season.
Thanks for the detail
any idea how this works at 5bn+ funds? thanks
Incoming associate in middle market PE and I have a very similar structure as JustADude - 0.1% carry on a deal by deal basis. Coinvest as well.
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