Actually Realizing Carry

Curious for more tenured PE folks - when did material, realized carry actually hit for you? ($>1mm of distributions?).

Based on my experience, every early tenured VP gets quoted some spectacular carry numbers - starting at ~$2-4mm and going up from there. But over the years, I've noticed a few things happen:

  1. People leave - and through one reason or another (unvested, redemption rights), lose a big portion of those carry $

  2. Illiquidity - no actual realizations for a very, very long-time - much longer than the ~3-5 years marketed

  3. Fund doesn't hit the 8% hurdle or isn't meaningfully above it so between holdbacks and low realizations, not a significant portion of carry is realized.

What have you all experienced? Are the conditions above more the 'norm' these days than the exception? Just feels like the real value / realization of carry is below to materially below what I expected when I first started in this industry.

Comments (40)

  • Associate 1 in IB-M&A
Aug 17, 2022 - 5:08pm

Bump - just got carry as an associate. Hoping I can get something out of it

Aug 17, 2022 - 10:51pm
throwawaybadabing, what's your opinion? Comment below:

At this point in your career, quality of deal experience, upward mobility path, mentorship far exceeds the value of the carry you got allocated - particularly in light of below. So yeah, just think of the carry as nice little cherry on top that may or may not have any value - but 100% do not let that drive any career decisions for you. 

  • 5
  • 9
Aug 20, 2022 - 12:42pm
WB97, what's your opinion? Comment below:

This is getting MS but I think it is quite insightful. You can have as many points as you like, but if it's with a terrible culture where you won't survive the 7-10 years required to monetise, it's worth nothing.

Most Helpful
  • Partner in PE - Other
Aug 17, 2022 - 5:29pm

Principal in PE here. I've been at two firms in my career and am only now starting to receive carry - I've been doing this for 15 years.

Here are a few pointers:

1. Not all firms pay-out carry at the same time. At my current shop, carry will only be paid in one lump sum at the VERY END of the fund's life as the managing partners don't want to deal with any clawbacks. Our latest fund is a 10+2 and we are half way in so I'm not expecting to see money from this fund for a while. Some firms will pay out carry in real-time once they're in the catch-up but then you may have clawbacks, and frankly it's a pain.

2. Yes, people leave and usually people don't understand just how bad vesting terms and all the legal jargon can be once you do leave. At my old firm we had a 7 year vest which was backweighted, 10/10/10/10/10/20/30, so unless you stay till the end you're not getting your full share. Secondly, often when people leave, senior partners in the firm can buy you out of your vested carry for a different amount - you gotta check the legal docs to understand what you're getting yourself into.

3. What I tell Associates/VPs to think of when it comes to carry is let's say we are aiming for a 2x net MOIC to investors and ~15% net IRR. Now assume our fund is more like a 1.5x and 8% IRR. Now assume you leave after 3 years. So if anyone is telling you you're getting $1mm+ per year in carry assume you're getting like $200k max.

Aug 17, 2022 - 9:20pm
m8, what's your opinion? Comment below:

Back weighted carry is brutal, never heard of that. Figured 20% over 5yr straight line was standard. Also lump sum at the end? Some funds can last 15 yrs…

I think the takeaway is that you really have to be at a single manager for a few funds for it to really to be impactful. I currently have carry in 3 funds, 1 of which has been paying out the last 2.5 years, 1 that is a ~1 year away, and 1 that we're still investing. Took 10+ years to get there. 

  • Associate 3 in PE - LBOs
Aug 17, 2022 - 11:29pm

Not that uncommon from what I understand for a 6/7 year vest.. so all things factored in you'll probably wait ~7 years after hitting VP for carry to fully vest and fund DPI to cross the hurdle before you get your first carry cheque. 

And looking at fund TVPI/DPI stats, I didn't see many crossing 2.0x.. they just dick around with cap call timings to juice IRRs. Curious to hear if anyone else has a different take. 

  • Associate 1 in PE - Growth
Aug 18, 2022 - 3:04pm

Back weighted carry is brutal, never heard of that. Figured 20% over 5yr straight line was standard. Also lump sum at the end? Some funds can last 15 yrs…

I think the takeaway is that you really have to be at a single manager for a few funds for it to really to be impactful. I currently have carry in 3 funds, 1 of which has been paying out the last 2.5 years, 1 that is a ~1 year away, and 1 that we're still investing. Took 10+ years to get there. 

Just curious on your point, so it took approx 7.5 years based on your math to start paying? circa 10 years less 2.5 years for the first carry fund that's been paying? I'm 3 years in PE (don't mind the title, haven't changed) and still haven't gotten carry in any funds. It's either about sticking it through with this firm or jumping ship, if the latter, then I probably have to prove my worth again for a couple years before firm's are willing to allocate %. 

Aug 17, 2022 - 10:47pm
throwawaybadabing, what's your opinion? Comment below:

Pretty much all in line with my experience and that of my peers. Surprisingly, this is at MF / UMMs. I think it's under-appreciated / under-reported how the carry economics really work. I think the only stories I've heard of carry really working out are at a small handful of firms that grew very rapidly the last ~5-10 years that had both fast deployment and fast realizations (i.e., good timing of markets) - and we all know what those handful of firms are. None are MFs

  • 1
  • Associate 3 in PE - LBOs
Aug 18, 2022 - 9:22am

Would largely agree - most of the stories I've heard of meaningful non-partner carry realizations were from guys that were hires early in the firm's growth trajectory and had outsized carry allocations and/or saw massive scaling in fund sizes vs. what you see at established GPs.  I received a VP offer earlier this year and it was pretty deflating to run the "real" math (not just assuming 2x MOIC and realizations in <5 years).  You have to be willing to take some kind of entrepreneurial risk if you wanna see the big bucks.     

  • Principal in RE - Comm
Aug 18, 2022 - 10:08am

Yep, carry only becomes valuable when you have a career path where you are. If you jump after 3, 5 even 7 years, you'll get very little carry

Aug 18, 2022 - 6:00pm
Deal Team Six, what's your opinion? Comment below:

Your post is incredibly informative, and I feel as though everyone contemplating PE should read it. I truly had no idea how long you had to "stay in the game" before carry materialized. Considering how many people last <3 years in PE, it seems as though carry is an immaterial portion of your total comp during that duration. In order to capitalize on carry you really have to be a lifer. 

For a long time I had thought about doing PE for 1-2 years but now I am realizing I would probably make less than I do now. I could be mistaken but am curious to get your perspective. 

  • Associate 3 in PE - LBOs
Aug 20, 2022 - 5:21pm

That second point is really important, the legalese is always going to be extremely fund-friendly.

Im not in the carry pool at my firm yet, but heard you forfeit 50% of your vested carry if you leave for a competitor (essentially any other pe firm). How typical is that position? Seems really aggressive to me.

Aug 17, 2022 - 8:47pm
SIB56, what's your opinion? Comment below:

doesn't this imply that in the long term you are better off working for an EB than PE, in terms of earnings? yes I know the potential earning upside in PE is much higher as you go up the ranks but how many actually do?

Aug 17, 2022 - 10:49pm
throwawaybadabing, what's your opinion? Comment below:

I've heard there are VPs at GS and certain boutiques that cleared nearly $1mm or more in comp last year. That is cash comp that is on par or slightly above principals at most UMM / MF PE shops as a reference point. Of course - the nature of the job is very different. But yes, IB comp has sky-rocketed while PE has not. 

  • 1
Aug 18, 2022 - 10:34am
CDO2022, what's your opinion? Comment below:

All true. Don't count on meaningful carry for 8-10 years. Longevity at a single growing firm pays off. Best to view your vested carry like a 401k / retirement fund - it has real value but you're not going to touch it. Live off your salary and bonus. 

  • Managing Director in PE - Growth
Aug 18, 2022 - 12:44pm

One thing to note, in Growth there has been a quickening of time between rounds and an increase in peoples comfort selling private secondaries, which have created shorter time to payouts (there are also less, and often no, hurdles) over the last cycle. I'm sure that won't continue forever but one of the funds I have carry in returned the 1x to the LPs in less than 4 years and started realizing carry in year 4 - it's at about a 1.5x DPI now in year 5 with a TVPI slightly above 4 (but inflated due to lack of repricing). We even only offer 7 year funds with three 1 year extensions, so our LPs expect us to both invest and return capital quicker. 

I do think 5 year vests with a 1 year cliff are "market" - but you have a longer tail to the back end then you do to the front end. 

Aug 18, 2022 - 1:17pm
Capitol86, what's your opinion? Comment below:

Not quite at the level the OP was suggesting, but have been in the game for roughly 8 years, just got my first carry payout not too long ago.  I had a little baby carry allocation from my time as an associate in a fund that is now a few years old and had good early returns of capital - carry check was about $100K. Our carry payments are discretionary in the sense that we don't have to distribute when earned if we want to be conservative/prevent a clawback situation, so think I have more due to me but that's what came out as we get into the harvesting stage (fund on track to be probably ~2.5x gross most likely).  Now of course, out of that $100K in carry, $20K goes to the government (about $10K now in estimated taxes, $10K when I do my 2022 filing next year), and then I will have $50K-$60K of that spoken for in my next capital call for the most recent fund with a larger allocation.  Of course those are investments so it's not "gone" per se, but not like I have it around to spend.  Probably won't get another carry distribution for another 6-12 months just based on where the next round of exits/div recaps are if I had to guess.

  • Managing Director in PE - Other
Aug 18, 2022 - 10:51pm

Good topic. I know many people who had significant amounts of carry that never saw a dime.

firms like to make this as much of a black box as possible. Some firms have a vesting period but if you leave even after being fully vested, they take 20-30%  off your carry for any deal realized at the time you are not in your seat.  This sucks ass, let's say it's a 10+2 fund, you stick around and grind  over 5-6-7 years and help deploy, but a lot of the fund is still not realized and you can lose quite a bit. 

There is also phantom carry, which gets paid out annually just like your bonus, it works like carry but if you leave, it's just gone - poof.  No real vesting schedule on that, it's just like another bonus but they call it carry.  They don't explain any of this to you either AND the fund docs suck ass and don't tell you much or anything. The idea that it's all spelled out in Fund docs is also false in my experience.

Having been at a few places,  I actually prefer the senior loan funds style of carry in private credit or even phantom carry bc the deals get realized quickly (~6+2 vs 10+2), you get paid annually and it's easier to understand wtf is going on. 

here's another thing, with Mezz/Pref type funds, if you are in a fund that is collecting a lot of non cash pay interest, you'll be reporting income but there's no real cash coming in the door to you. This sucks because these types of deals can take a long time to get realized, you have to pay tax on the earnings (which is pik interest and not cash pay) and you are being pushed into highest tax bracket and paying taxes on these earnings without  any real distributions.

all the while, you are expected to pump real cash into coinvest on the next funds. At a certain point you just want the dang cash and don't even care about coinvest returns bc money gets locked up there as well. 

Sounds great , eh? 

  • Principal in PE - Other
Aug 20, 2022 - 11:17am

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Aug 20, 2022 - 5:04pm

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