Naive question - in my mind, if I was a VP in PE, I would retire as soon as my >$2.5 million carry cheque hits. With appropriate saving, it is certainly achievable to have savings of $3-4 million, which is plenty to 'retire' or switch to something else.
What retention structure is there for these individuals?
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That "$2.5M" carry will take 5-10 years to fully vest (depending on vesting structure), and even if it's fully vested, there can often be clawbacks if you leave early. In general, to get every last drop of that quoted carry figure, expect to stay 10 years at one fund.
The wealth creation in PE happens when you stay at one fund for 10-20 years post associate stint and stack multiple funds on each other, and see carry paying out from 3, 4, 5 funds etc. At this point you are in your mid 40s to early 50s.
And the real wealth creation is if you own a stake in the GP of a successful firm :).
What happens when people job hop? Would they require the next fund to match their carry or would it have to be more to make sense?
The previous poster explained accurately some nuances around how long it actually takes to realize carry, but even ignoring that... $2.5M isn't anywhere near enough to retire when you're young and high earning.
That might seem like a silly thing to say -- lots of people retire with a lot less in the bank! -- but it becomes obvious when you think it through a little bit.
It's easy to think that drawing down 4% of $2.5M while it's compounding at 10% should be fine. After all, who needs more money than that? The S&P has averaged 10% for decades! How could that go wrong? Well, the issue comes when you have to spend significant money in a down year. Your life is structured around spending 4% of $2.5M -- you likely can't meaningfully reduce your spend below that, and you'll overspend the 4% when you have a big outlay like college tuition for your kid or whatever. If the timing of that overspend happens to line up with a down year for the market, now you're drawing a meaningful amount of principal -- and you don't have a job anymore, so you don't have any way to make it back. So now your future income, for the rest of your life, is going to be 4% of a smaller number than you thought it would be. That only has to happen a couple of times for you to be a lot poorer in retirement than you think you were gonna be.
Once you've left a job that pays PE money and been retired for many years, you can't easily go back and make that kind of income again. Do you want to risk retiring in your 30s and then going back to work in your 50s bagging groceries? Most people don't, especially most people who make high earning professional money. The obvious thing to do is work a couple of extra years when you're making 7 figures, to put some cushion in the bank.
Put all that together and it's very hard to retire when you're in your peak earning years if you only have $2.5M in the bank.
Well said. And the same reason why former non-founder executives that walk away from transactions with a nice nest egg but not life changing money ($1-$5M), are still taking GLG expert calls with 25 year olds and sitting on boards of $20M EBITDA co’s. Half are just addicted to work (and / or money) and the other half come to the realization that they can’t sit on their ass all day for the final 30 +/- years af the same levels of annual spend.
You don't get to keep your first carry checks. They will be rolled into GP commit for the next fund which may well have >10y realisation horizon. If you refuse then you will be shown the door and you can say goodbye to any remaining unvested carry.
If the question is why don’t you leave the above can’t be the reason bc you wouldn’t co invest if you left anyway
Because who doesn't want more? Quitters attitude. And retiring on just a couple million is not what people who've worked that hard for that long are interested in.
Once again I'll say none of this is an issue if you marry rich
Ever hear the line “the hardest money you will ever earn is the money you marry”?
Imagine retiring right when it’s starting to finally get good
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