Being recruited to PE from Corporate America

Greetings all - 

I'm being recruited from a C-level role in corporate America to be a managing director on the operating side of things for a PE firm. This firm has +$20B under management with a great track record of returns.

The work sounds interesting to me but I'm sightly worried about the risk of carry award over 5-10 years vs my current equity comp of stock options + RSUs that vest every year along with the flexibility to cash them out if I want. 

1) Seeking opinions from people on if this is a legitimate worry? 2) I'm having a hard time modeling out the total comp of the carry award. Would anyone be willing to help me with this if I sent the data? 3) What other questions should I be asking? 

Thanks in advance


Hey there!

1) Your concern is absolutely legitimate. Carry awards in PE firms do come with their own set of risks and rewards. They typically vest over a period of 5+ years and can be forfeited if you leave the firm. However, the vested portion still pays out and can be incredibly valuable. It's a different kind of equity compensation compared to stock options and RSUs, and it's normal to feel a bit apprehensive about it.

2) As for modeling out the total comp of the carry award, it can be a bit tricky due to the various factors involved. These can include the vesting schedule, the performance of the fund, and the timing of exits. Unfortunately, I can't help you directly with this, but I'd recommend seeking advice from a financial advisor or someone with experience in PE compensation structures.

3) Some other questions you might want to ask could include: What's the typical vesting schedule for the carry? What happens to the carry if I leave the firm? How has the carry performed in the past? What's the expectation for future performance?

Remember, it's not just about the money. Consider the work you'll be doing, the people you'll be working with, and whether this move aligns with your long-term career goals. Good luck!

Sources: Finance can ruin your career (hot take), Carry in REPE, Vice President Fund Carry/Equity

I'm an AI bot trained on the most helpful WSO content across 17+ years.

1) It is definitely a legitimate concern - things you may want to think about are (i) vesting schedule (and whether you keep vested carry upon departure), (ii) likelihood of hitting carry targets (based on prior returns, where the fund is focused, strength of current team which might be different from the team that delivered prior returns), (iii) which fund(s) you will be getting carry in (i.e., giving you half your carry in a new fund vs. the other half in an old fund that's garbage and unlikely to hit the carry is obviously just them trying to bullshit you out of half your carry), (iv) how much ability do you have to influence the outcome (you may or may not have had more influence in your prior C-suite role; if you'll have less influence at the PE firm, you'll be taking more of a bet on the platform / key decision makers which is fine if they're reliably delivering returns).

2) What have they provided you with?  I think it's fairly standard for the firm to provide you with an estimated $ value of your carry award at different fund outcomes (or at least at a "standard" 2x)... if not, I think you should ask HR / your point of contact for a simple schedule.

A simple back of the envelope calculation is to take the starting fund size, compound the hurdle rate (usually c. 8%), and make an assumption on when the fund outcome is achieved (i.e., 2x in year 6).  Then take the gross proceeds (i.e., 2x fund size), subtract the starting fund size PLUS compounded hurdle rate (say on 100m fund it would be c. 160 by year 6), which gives you the total profit dollars.  Then take 20% of that to get the total carry pool and apply your percentage of that total carry pool to get your share of carry dollars.  You can then sensitize the gross fund multiple (say 1.5x - 3.0x) and also the timing of when that is achieved to show different outcomes for the carry pool.

The "actual" waterfall of proceeds may look somewhat different (usually the investors are paid back their principal + minimum hurdle return, then the PE firm gets 80% of the proceeds until they get 20% of total profits, then it switches back to 20% / 80% in favour of the investors)... but for most relevant outcomes this napkin math should give you a decent framework to think about.  Obviously cross reference this with what the company is suggesting your allocation is worth at specific fund outcomes to make sure the economics reflect the deal you think you're making with them.

Let me know if anything is unclear, otherwise best of luck in your new / old role!

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