Actually Realizing Carry (PE)
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:
- People leave - and through one reason or another (unvested, redemption rights), lose a big portion of those carry $
- Illiquidity - no actual realizations for a very, very long-time - much longer than the ~3-5 years marketed
- 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.
Needless to say, variance by fund and vintage is high. The DAW number often quoted assumes 2x gross at the fund level which is actually a fairly high bar taking into account management fee drag and less than 100% deployment. And it takes a long time: if you join as an fresh associate and only get carry 2-3 years in when a new fund is raised, it'll easily take another 6-7 years before the new fund clears 1x + 8% IRR DPI.
Personally, I've heard of some spectacular numbers exceeding the promised numbers but those tend to be in lower mid-market funds where there's one or two homeruns carrying the entire fund. I suspect at mid to large funds, your observation would be the norm for the average mid-level PE professional.
I have not firsthand seen anyone below the partner level make meaningful carry realizations and these were guys that were around since the fund's early days. For VPs and Principals, more scenarios #1 and #2. It was extremely underwhelming to actually the run the carry math on a VP offer and I think carry is heavily misconstrued both by managing partners trying to entice VPs and by people on this forum (e.g., Intern at IB salivating over MF PE partner comp potential).
PE as an asset class has rapidly matured over the past 10-15 years, and you have to take some sort of entrepreneurial risk to see meaningful carry quickly (either starting your own fund or get in on the ground floor of a rapidly scaling one). Otherwise, you're basically grinding your way to the partner level over a +10 year period and that's assuming you can stick it out.
This is the correct take.
Then is it just basically luck to getting wealthy in PE?
bump
Agree with what everyone else has said, but I would make a meaningful difference between very established funds (MM+) and LMM/start-ups/independent sponsors. Cash comp will be lower in LMM/IS, but the carry economics can be much more attractive. For example, deal-by-deal carry is a significant advantage as (i) carry checks come after you get a realization, (ii) if you have a homerun deal, there are limited clawbacks as far as other deal performance and (iii) if you're at a deal-by-deal firm, it's more than likely that it's only a few people and there probably aren't a lot of mouths to feed, unlike MM+.
Obviously, there is more risk at LMM/IS, but that's the trade off. Lower cash comp but higher probability of actually receiving carry $'s.
What is your view of standard comp for a senior associate and VP at a LMM independent sponsor (deal by deal)? Cash / Bonus / Carry
That's a tough one as it's so dependent on structure, # of IP's, portfolio companies etc., which are all over the place at smaller firms. For a VP1, I'd say ~$350-$450k is probably a reasonable cash range. Carry DAW - $500k-$1.5m is also in the ballpark. Again, really hard to put a figure on it without knowing the specifics.
I work in a special sits team (ignore the title), where the fund dynamics are more attractive. I am approaching $1mm in total realized carry (out of total DAW of ~$7mm) as a senior VP, which is attributable to a bunch of cash paying investments and a few early exits. I've realized significantly more than my peers at other firms.
Nice. How many years experience do you have in PE and/or post MBA?
7-8 years of buyside experience
Can you describe what favorable fund dynamics look like?
A bunch of cash paying investments and a few early exits
Anyone work in a fund that has a European waterfall? How is that carry usually distributed, end of the fund life? What vehicle are carry dollars kept after exits in this case?
The carry isn’t “saved” or “kept” separately. All of the money is distributed to the LPs until the hurdle is met. After that there is a catch up where subsequent distributions go 100% to the carry participants. Once through the catch up, the distributions are split (typically 80/20 LPs/GP).
You should expect to get paid out years 7-10. But just because something isn’t ‘paid out’ doesn’t mean it isn’t valuable. If you’re in year 5 with a large vested carry balance across a diverse group of successful companies, you just view it as savings / net worth that you have to save instead of spend. Like a 401k, albeit in a higher risk/return portfolio than the s&p. Use your salary/bonus to live on and the vested carry as long term savings. Chances are once you get ‘paid out’ you’re going to stick it back in the stock market anyway. You’re hopefully raising a new fund every 3-4 years, so creating a diverse portfolio of carry for yourself over time.
Yep. To add to this I would basically say that if you're moving around, you should view carry as 0, but if you're staying that's where it compiles. I hear you on 5 years with the vesting, but a lot of places are pretty cagey about this kind of stuff (when you first get there it's phantom carry, then you sign docs, docs may be unclear, if you're leaving they may ask you to leave carry on the table otherwise you'll have long non-competes / non-solicits, etc.). Really to me it's being somewhere when you're 25, and if you're there 6-8 years later and things are going well, you can really start to bank on carry and as you said, once you start, although it hits every 7-10 years per fund, you'll hopefully constantly be raising new funds (and then new types of funds, debt funds, etc.), so you'll start getting carry checks on a very regular basis.
Curious if you (or others) have a sense on how common it is for firms to ask you to leave vested carry on the table. If anything, I've anecdotally heard it go the other way assuming you're leaving on good terms / not going to a direct competitor.
Related, when you're interviewing, is it kosher to ask if the firm gives out carry / at what levels? Obviously wouldn't ask for #s, but this would realistically be a factor for me
ask after u get the offer
There is no shortage of horror stories about funds not clearing their hurdle or people not getting paid out meaningful carry until they are Partners, but that isn’t always the case. I was granted meaningful carry at age 26 although I forfeited most of it to go to business school (my choice, not the best financial choice in hindsight, but life isn’t always about maximizing earnings). That carry would have paid out by the time I was around 32.
In the end I retired on carry granted/earned pre-Partner level…. I wouldn’t call this normal but it is very possible if you’re invested in funds that perform well.
how much would the carry have been if you didn't go to business school?
I never actually did the math (sometimes it is better not knowing what you gave up), but about $4.0 - $5.0mm realized pre-tax is a decent ballpark number?
goddamn, that's a lot
on another note, what would you recommend to people who aren't in PE yet who want to figure out if they enjoy / have a passion for PE?
Did I understand correctly that you retired on ~$4-5m Carry? If so, is it fair to assume that this made up the majority of your net worth? How were you thinking about your "exit number" at the time? I admit I might be delusional but is that number not potentially a little bit low, assuming you retire in your 40s (and hence still have 40+ years to feed yourself through)? Granted I don't know what you are doing with your money and hence genuinely curious how I should be looking at this also for myself. Have seen your contributions to the forum elsewhere and hence appreciate any insights!
Unfortunately I don’t think you did understand correctly. I was saying that I was granted carry that would have been worth $4-5m, but I elected to go to business school and therefore forfeited the majority of it (due to only partially vesting).
Separately, to your question on “how much is enough to retire early” … you’re only looking at part of the equation. A HUGE piece of it comes down to your expenses. Where you live and how you live will substantially change how much you need to retire. Some things to consider:
Say you have $5.0m in the bank (post-tax) today. If you can invest that and earn just 2.0%, that gives you $100k/year pre-tax to live. $100k is well above the typical salary of most Americans, including some people who are supporting entire families. Plus, you’ll likely be paying capital gains taxes on the $100k rather than ordinary income. If your investments earn 7.0% (a decent long term average), you can grow your principal at 5% per annum while continuing to live off 2.0% each year. In theory, this will put you ahead of inflation.
The challenge for most people in finance is that their lifestyles expand to the point where they burn through hundreds of thousands or even a million bucks a year. I’m talking private schools, first class flights, fancy cars / planes, lavish vacations, vacation homes, country club memberships, and constant fine dining. This all adds up, fast. It’s one of the reasons why you generally don’t see people walk away from PE even in their 40s … their cash burn is too high to retire.
My personal belief is that you can be just as happy living off $100k as you can off $1 million / year. I retired at the end of 2021 and now spend my year following the sun (winters in Florida, spring - autumn in Europe). Last summer I spent three months in Italy going out with friends, hiking, going to the beach, playing soccer, a fancy gym membership, learning Italian, etc. I lived in the heart of the city in a beautiful apartment with a private terrace and stunning view of the city / ocean. I didn’t count, but I spent maybe $4k/month, half of which went to rent. My people in the area make about EUR 15k / year (not a typo) — I was living like a king. Sure, I wasn’t eating out at Michelin star restaurants, but I’d argue the homemade Italian meals are just as good as anything you’ll find in a restaurant. I’m going back this year for four months, as well as spending four months popping around Europe seeing friends (Valencia, London, Germany, and other locations TBD). I’d argue that despite my expenses being a fraction of someone in finance, I’m much, much happier.
Now obviously this lifestyle isn’t for everyone and it does come with a degree of risk. I have more than $5.0m liquid but I would have been comfortable retiring with $5.0m in my 30s. I would probably struggle to have a decent quality of life if I had stayed in London. Regardless, the point still stands that if you manage your cash burn, you don’t need nearly as much cash as you think. There is actually a pretty big movement dedicated to this line of thought called FIRE — Financial Independence, Retire Early. A lot of the people I’ve found deploying this strategy are retiring on just $1-2 million of savings (way too risky for me). Google it — it is an interesting read even if you don’t plan on retiring early.
Lastly, and this actually wasn’t part of my original plan, but I’ve been able to supplement my retirement income with my coaching business (which I’ve really enjoyed). The key part of retirement for me is to be able to live wherever I want, whenever I want, and be in control of my own destiny. I probably need to scale it back a bit, but I’m actually run rating to close to $100k/yr pre-tax, which means I’m not even tapping into my investments at all right now. There are SO many different ways to make money in this world — I’m confident that if something catastrophic happens 20 years from now I’ll be able to find a way to make enough money to live a good life.
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