Compensation in New Funds
At the point of negotiating compensation to join a new fund as the first junior investment team member. Cash compensation is a bit below market given it’s a new fund.
Are there any other forms of compensation I should bring up? I’ve heard of some funds where the GP invests on behalf of employees so they basically get a “free” quarterly distribution. I’d prefer something like this over carry given the uncertainty and time to realize the carry but curious if anyone has been in a similar situation
When negotiating compensation at a new fund, especially as the first junior investment team member, there are several additional forms of compensation you can consider beyond cash. Based on the most helpful WSO content, here are some options to explore:
GP Commitment Participation: Some funds allow employees to participate in the GP's commitment to the fund. For example, if the GP is required to commit a percentage of the fund's capital (e.g., 5%), you could negotiate to have a portion of that commitment allocated to you. This could provide you with distributions tied to the fund's performance.
Profit Sharing or Quarterly Distributions: As you mentioned, some funds invest on behalf of employees, offering "free" quarterly distributions. This is a great option to bring up, as it provides more immediate cash flow compared to carry, which can take years to materialize.
Phantom Equity or Deferred Compensation: If the fund is hesitant to offer direct equity or carry, you could negotiate phantom equity or deferred compensation plans. These mimic the benefits of equity without requiring actual ownership.
Co-Investment Opportunities: Request the ability to co-invest in deals alongside the fund. This aligns your interests with the fund's performance and can be a lucrative opportunity if the fund performs well.
Carried Interest (Carry): While you expressed concerns about the uncertainty and time to realize carry, it’s still worth negotiating for a small percentage of carry, especially if the fund grows and performs well over time.
Loan Programs for Investments: Some funds or family offices offer loans at favorable rates (e.g., LIBOR + a small spread) to employees, enabling them to invest in deals the fund is pursuing.
Other Perks: Consider negotiating for other benefits like professional development budgets, flexible work arrangements, or even a signing bonus to offset the below-market cash compensation.
Each of these options can help balance the lower cash compensation and align your incentives with the fund's success. Be sure to tailor your ask based on the fund's structure and what they might realistically offer.
Sources: Paying for carry at fund, Family Office vs. Traditional LP Career Path, What is your compensation in Real Estate Finance?, PE associate comp, Acquisitions Analyst Compensation
what is the structure of the fund? evergreen or closed end? Sometimes evergreen vehicles earn incentive fee quarterly/annually - receiving quarterly carry payments is really nice, but yes its tied to the performance of the fund, as is your salary when it comes down to it since you taking start up-like risk. If the team is putting new money in the ground today, you carry will be steady for at least a few years since bad deals usually take time to spoil. Memorialize your carry points in writing otherwise you'll be diluted down as the platform grows (i.e., you are allocated 3% of the carry pool on day 1 which is ok at 500m fund but fast forward 5 years and the platform is now $2b and the founder will come to the conclusion that he is overpaying you.
You can try for a small piece phantom equity in the GP but not sure how much leverage you'll have on day 1.
Its a crowded market which makes in difficult for new entrants in terms of fundraising so account for that in whatever model projections the founders show you to quantify the carry pool potential.
It’s a closed end fund. Do you have any datapoints on how much phantom equity is typically awarded to employees? I believe the GP is committing ~10% of the fund so there should be some money to go around
i mean it would be extremely dependent on your scenario. I'd push for real equity first then settle for phantom equity. you can likely run different napkin math scenarios of expected payouts if you had a 1%/2%/3% stake. With phantom, you don't own the equity so appreciation value doesn't matter though as the firm grows, but yes it will be more profitable and distributions will get lumpier. Think of your phantom equity stake as a kicker in addition to whatever carry you negotiate. Its a long term play. 1% of $500m fund assuming average performance is what like an extra 30-40k (double check math) per year assuming equity makes a distribution. And the firm would only make an equity distribute after it has paid its employees carry. So basically its a way to skim a bit more of profits. If you grow within the organization, you are incentivized to keep costs low (not overhire/overpay).
Maybe im mixing up concepts, but im thinking something along the lines of ~10% of the GP commitment is allocated to employees and I would receive ~10% of that? It’s a credit fund so will be making quarterly distributions and I think this would be a way to offset below market comp. Would you also advocate asking for carry in this scenario?
One thing worth asking for in a new fund is some form of co investment support or profit share that pays out more regularly than long term carry. Some funds let the GP commit on your behalf which gives you small quarterly distributions and helps balance the lower base. You can also ask about bonus structure, any guaranteed bonus for year one, and how they treat promotions in a small team since your workload will likely be wide.
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