Question for any senior guys out there. I am a VP in the private equity group of a large firm. I am considering an offer from a start up private equity firm, who is being founded by an ex-MD of mine in PE and is going to close on a first fund over the next few months (should be around ~$300M). I would come in as a VP or Principal level, and would be the third most senior person at the firm (two Partners above me, two associates below me and maybe another VP/Principal level other than me). My proposed comp will be comprised of cash comp, carried interest, and co-invest opportunity.
My question is the following: do you think it is reasonable ask to be able to buy into the GP? It would be nominal (1-2% of the GP commitment) but really want to be able have some GP ownership to align interests with the Partners and capture some of the upside opportunity as this is obviously much riskier than staying in my current position.
Is this a reasonable ask or completely out of bounds? Let me know any thoughts and thanks in advance.
Doubt anyone on this board will have a good answer for you, but you'll never get what you don't ask for. If you do ask for it, I would try to be prepared for pushback just in case. Off the top of my head:
A. You didn't provide any of the start up capital or take on any financial risk when your ex boss was out fundraising on his own.
B. Your job as a VP/director is to make good investments, and you already get participation via carry / co invest (so consider asking for more points or something). AUM shouldn't really factor into your role.
Just some things to think about before asking.
For clarification, are you talking about buying into the General Partnership or the management company? It is extremely unlikely that you would be permitted to own any of the management company, even 1 or 2%.
If you're talking about making a capital commitment to the fund, I would fully anticipate this to be a requirement. Most L.P.s want the G.P.s to commit to investing personal money that amounts to around 2.0% of the fund size -- $6.0 million in your case. As an individual who is receiving carried interest you should be expected to put in your pro-rata share of the $6.0 million capital commitment, assuming you can afford it. This isn't really a "badge of honor" or something you should be asking for if you already have a separate co-investment program that enables you to invest on a deal-by-deal basis.
As CompBanker mentioned (great to see you back, by the way), it's exceedingly likely that they won't let you into the management company.
CHItizen's comment is not correct; his comment about AUM makes it sound like he's thinking about the Investment Manager entity, the vehicle receiving the management fee income every year.
If you're asking about the GP (vehicle that receives the carry payments), that's not outlandish at all. There are often more hands in that pie than just the founding partners of the firm. Your soon-to-be boss may have already given away a slice of it to a seed investor, for instance.
The way I'd position this is along the lines you described, that you're looking to create an alignment of incentives for the long term. The answer you get should grant you some insight on the thought your potential future boss has already put into succession planning. (Depending on your relationship with the guy, it may even make sense to be vocal and candid about that topic in particular.)
You are correct in that I am referring to the vehicle that receives mgmt fees, but I think you're not understanding OP's question - he's definitely not asking about carry.
OP already gets carry - why would he get to double dip into this pool? And if he does get to double dip for some reason, why would he need to "buy into" a newly formed carry vehicle? That doesn't make any sense - ownership simply gets allocated. So he has to be asking about the vehicle receiving mgmt fees.
Since he mentioned "General Partnership," my read was that he was asking whether or not he could buy into the carry vehicle.
While he's receiving carry as part of his compensation package, he wants also to be getting a sliver of the pie that goes to the partners (the founders of the firm, the guys who are employers rather than employees).
Illustratively, let's assume: - a standard 2/20 structure - as OP says, two founding partners (let's say Andy and Bob) - two points of carry dedicated to non-partner employees
Right now, OP and the other VP/Principal (let's say Charlie) are each receiving a point. What OP wants is to be able to buy into the GP vehicle that is receiving the other eighteen points. Understandably, whatever amount he can pony up will buy him a very small portion of the vehicle, but it's demonstrating his long-term commitment to the firm plus the founding partners' commitment to him.
Without that, he and Charlie are always stuck getting a small slice of the pie. Without that, Andy and Bob can fire him (or keep him in limbo without ever promoting him to partner) and cut him out of future cash flows from the fund's performance.
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