1% carried interest for a $200m fund? what does this mean

Really don't know how carried interest works and I'm interviewing for a PE / VC fund offering 1% carried interest on a $200m fund.

Could someone explain how it works and what it will mean for me in terms of how much $ I will walk away with and when I will see paid in my bank account?

Let's assume the following:

  • size: $200m
  • fees: 2% mgmt / 20% performance
  • lifecycle: 5 years
  • Return: 3x over the 5 years which I think would be around a 25% IRR

Comments (22)

  • Analyst 1 in IB - Cov

200M fund * 3x MOIC = 600M

600M - 200M return of initial capital = 400M profit

400M profit * 20% GP allotment = 80M carry

1% * 80M = 800K Dollars at Work (DAW)

If you want to annualize over 5 years that's 160K per year but it could take longer than that to start realizing carry

pe mvp, what's your opinion? Comment below:

Realistically, it will be a bit less attractive than that.

- 5 year holds doesn't mean it's a 5 year fund. More likely takes 7-10 years to realize everything depending on the vintage.

- after management fees, a 200M fund only deploys ~160M. So the carry pool on a 3x will be ~64M.

- I would discount the likelihood of any fund grossing 3x.

RB2000, what's your opinion? Comment below:

Can you explain how you got the 64mm? Weren't management fees already factored in? I'm a college student exploring the space.

  • Analyst 1 in PE - Other

You would be getting 1% of the total carry pool. So 1% of the 20% = 0.2% carry

1sf, what's your opinion? Comment below:


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TryTheDip, what's your opinion? Comment below:

This is a pretty long response with some helpful points but a number of glaring inaccuracies.  

Carry is very normal, nothing about this comp plan looks unusual to me. Bonuses get paid out of management fees (the 2%), which are separate from carried interest (the 20%) - it would be extremely unusual and off market to get carry and not get a bonus. The only places that do that tend to be independent sponsors (no committed capital, may or may not get management fees), but even then it's usually deal bonuses or something. Per OP these guys have a $200M fund. 

IRR is irrelevant except for hitting the pref. You get paid on the dollars in the carry pool, which per above is 20% (this is market). That means you take the total return (3*200 = $600M), back out the cost basis ($200M), and capture 20% of the $400M. $80M pool, you get 1% which is $800k. As someone else mentioned, you'll never deploy 100% and 3x net is tough to hit. However, don't forget that carry is tax-advantaged - $800k of carry distributions (capital gains) is worth more than $800k of additional bonuses (ordinary income).

Almost every fund will have a catch-up to the LP hurdle. LPs get their 8% pref, but as long as you clear the hurdle by any meaningful amount you get 1% of the total 20% pool (if you don't clear your catch-up there's not much money to go around anyway).

The money is subject to vesting, but you keep your vested carry even if you leave (although it doesn't get paid until later). That's yours when you exit, full stop. However, there are ways you can get fucked on the vested dollars depending on the fund structure - some let the GP buy your carry at the marked MOIC (unless you're about to exit, decent chance it's marked low enough that there's no or little carry). Others will forfeit some of your vesting if you get fired or go to a competitor. It's pretty much always 100% forfeit for bad acts, but hopefully that's not an issue for you…

Also, you would never say you 3x'd because you raised more money… that's just not how this works. Since base and bonuses are paid from AUM fees, more AUM should be better for your bonus, which has nothing to do with returns

1sf, what's your opinion? Comment below:

Excuse me if I'm wrong, but for the most part you reiterated everything I said except for bonuses being paid solely off of carry.

Carry is done annually and you have to get above pref for that (which is typically 8%). Associates are getting a piece of the GPs carry; they aren't getting their own carry. So it takes effect above 8%. So even in your calculation of 200M 3x-ing, you would only get 768k. But, the main thing I was trying to emphasize with my post is that a lot of people were doing the calculation that you did with carry when you should be doing annually to get a more accurate picture. This is because there is a big monetary difference between clearing a 8% pref over a five year chunk, and having to clear it independently each year which will further eat at the 800k in your post and bring it closer to 700k assuming 25% growth each year. Then beyond that assuming inconsistent returns and a fund not performing at 25% each year its only getting lower.

I think we're on the same page about the 600M aum 3x thing too. I was trying to point it out the same way you are that while OP might see funds go from 200m to 600m over five years that's not actually 3x-ing and making sure he understood that. (moreover, I was saying its good to get more money in your fund, buts its not as good as if you were to earn that from returns).

And yeah, this is a typical PE comp plan, but it certainly is a confusing one if you've never seen it before.

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CompBanker, what's your opinion? Comment below:

I'm a little late to the game but I think TryTheDip offers the best explanation. I've made a few posts about carry calculations over the years so if you do some searching, you can probably find a fulsome explanation. But some basic thoughts are:

1 - The industry standard is to measure carry on a 2.0x gross return. This means at a $200M fund, you'd return $400M to LPs, for $200M gain. At a 20% carry rate, that's a carry pool of $40M, of which you'd get 1.0%.

2 - There are other factors that influence the carry calculation, which you can ignore if you're doing the industry standard method described above. Essentially, the 2% management fee needs to be repaid before you start calculating returns. So over the life of the fund (typically 10-12 years), you may actually charge LPs tens of millions of dollars in management fees. These need to be returned before you start calculating the fund profit and therefore carry pool.

2.1 - On the flip side to the above, the transaction and management fees charged to portfolio companies are often used to offset the 2% management fee charged to the LPs. For example, with a $200M fund, instead of charging 2% per year ($4M), the PE firm may be charging their portfolio companies cumulative monitoring/deal fees of $3M, meaning you would only need to call $1M of capital annually from the fund instead of the normal $4M. This reduces the amount of management fee you need to pay back before you start calculating profit.

3 - While carry may take 7-10+ years to actually pay out, in all likelihood once the initial 5-year investment period has expired, the PE firm will raise a new fund. You will in all likelihood get an additional quantity of carry from this new fund, with its own new vesting schedule etc. For this reason I like to calculate the annual value of my carry by taking the gross value and dividing by the number of years before a new fund is raised. (This method falls apart if you plan on leaving the firm and lose unvested carry).

4 - TryTheDip's comment about IRRs and return hurdles / catch-up provisions is an important one. Generally the first 8% goes to LPs and the next 2% goes to the carry pool, and all subsequent returns are 80/20%. For this reason, as long as your fund is over 10%, you don't really care about IRR for the purposes of calculating carry .. you only care about the actual cash return.

Hope this was helpful.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/

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J-Curve, what's your opinion? Comment below:

Also you need to make sure to see if there is GP cut of the carry.

Some PE firms will allocate some percentage of the carry pool (i.e. 30-40%) to the GP, with the rest split among investment professionals. In that case, your 1% would be of the 60% - 70% of the carry earned allocated to investment professionals. Depends on wording in your contract, but that's what 1% means at some funds.

CompBanker, what's your opinion? Comment below:

Are you referring to the management company when you say the "GP cut of the carry"? 

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/

J-Curve, what's your opinion? Comment below:

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