Been asked if I want co-invest on our latest deal. Normally this question only comes after 5 years of employment, but it was a recognition of good work.
I would get leverage from the fund, albeit at a high interest rate (think S+400).
I like our deal, but the personal economics look quite bad if for some reason I leave early. I am not sure I want to stick here for another 5 years.
Basically you get the lower of the FMV or cost + small ticker (~6-8%). So at current rates the interest on the debt would be bigger than the accrue of the equity.
I think I could better decline, keep my money and look for a place that first allocates Carry (which is no cash out for me) and at more senior levels allocate/require co-invest. Also think a lateral move might increase cash comp anyway (Aso 2 at 30bn AUM fund: all in £200k last year).
This just feels like paying for my own retention programme.
Curious to hear the thoughts of others.
Sounds like a bad deal imo - every instance of co-invest I've come across, there's no employment contingency (e.g., you keep it even if you walk).
5 years is a long time, esp. if you're an associate and still figuring out where you want to land long-term. Unless this is some homerun deal AND you really see yourself sticking around / building a career here, would probably pass.
So if you leave, you owe them money?
Easy pass
I'm no co-invest expert, but unlike carry, all of the examples I've seen of co-invest generally let you keep it even if you leave. That's the big benefit of Co-invest vs carry, especially for junior folks. I could maybe see a small clawback, a year or so, but as an Associate, 5 years is a ton of time.
Also, to me raises questions around how long you ever can stay at the firm. What happens if they two and out you. Or if they decide they want you to be a Senior Associate for 4 years or something like that.
I'd either pass on it, or if possible, negotiate better terms. Seems kind of a non standard co-invest package to me, but again, not an expert. Also, high interest rates to me is also a red flag, most of the leveraged co-invest packages I see are low to no interest. At S+400, you could almost just get a personal loan at that rate.
Pass for me, not really as much of a benefit as it seems, even though I guess it's a "nice" gesture by the firm.
The debt is non-recourse.
Let’s say I put in 50k and borrow 150k.
If after one year the FMV is 300, I will get the lower of (assuming 8% interest):
300 - (150*1.08) = 138k
And
50 * 1.06= 53k
So I will get 53k.
If FMV is 200 still I get lower of:
200-(150*1.08)= 38k
And 53k - so I get 38k
If FMV is 100k I get nothing, but also owe nothing.
Yes but you put in 50 so you still lose money
It's generally non recourse debt anyway this is off market decline
Out of curiosity, is it normal for the debt to have recourse on other deal proceeds though? In this case, if I lend 150k and the company goes bankrupt, the 150k (and PIK interest) will be deducted against any proceeds on the exit of another deal.
I won’t be asked to pay for it (ie I could decide on the next deal to only invest 10k and that would be it), but I will only see proceeds after repayment of that debt. Is this normal, or is every aspect of this deal non-standard?
It really feels like paying to lock myself up.
Correct, can lose what I put in. Thought you meant I would owe the fund due to the leverage.
I posted an entire comment but didn’t make it somehow. In short I said I wouldn’t do it. You have a lot of single stock risk and the leverage you take on will count against you when trying to get a mortgage etc. You have no control over the liquidity. The leaver clause is ridiculous for co-invest. You wouldn’t buy this as a stock pick
side note it’s probably career suicide at your current fund to not take the coinvest so you better make sure you’re comfortable with that
Don’t think the leverage wjll show up in my mortgage as it is no cash outflow (PIK loan) with no recourse, but it does mean I likely cant afford a house anymore (if I am asked to invest 50-70k a year on different coinvest deals).
Aware of the potential career suicide, but my immediate response was the above “I am not sure I have the cash. Been saving for a house as I did not expect this question for a few more years”. It will still raise questions, but initial reaction was that they understood and would give me time to think that through.
But yeah all in, if this is how they view generous incentives now, doesnt feel like worth waiting to see how little carry they give at VP level and up…
Does it have to be $50k? Could you put in $10k or something like that?
Potentially, but not sure. Think there is a minimum threshold of 30ish due to admin involved.
This feels off market, would also decline.
Greedy fucks. Doesn’t sound appealing to me if you have all the terms right and putting you in a bad spot. If you’re being intellectually honest seems like you have to decline since it’s asymmetric risk unless you think the deal is a slam dunk
You have no upside in this terribly shitty „deal“. Is this a joke?
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