Carried interest for open-end fund

A lot of open-ended / evergreen funds being set up recently (BX Core Equity, Carlyle Global Partners, EQT launching an infra vehicle).

How does carry work? Management fee is based on NAV, but how is the carry pool calculated when there is no set time period to realize investments?

In theory the fund could never sell assets while racking up unrealized gains and never pay carry, but I'm sure that's not how it works. 

 

Thank you. Any chance you could please walk me through the mechanics?

For example, assume $5bn committed capital, 15% carry, 8% hurdle, and 25 bps carry allocation. How does the math work for dollars in my pocket? When do I see cash if the capital is invested in perpetuity?

Is it as simple as every [Dec. 31], we compare NAV at Year 1 to NAV at Year 0, and carry is allocated on the delta? What if the fund is fundraising at the time? So say we have $5bn committed in Year 0, 5% yield so +$250mm from PortCo dividends, 15% asset appreciation so +$750mm from EBITDA / multiple expansion, and the fund raises an additional $1bn from LPs. What's the carry pool?

 

Can only speak anecdotally (speaking to friends) - mgmt fees to your point are calculated on basis of NAV (on a periodic basis e.g. quarterly).Carry fees are done in similar fashion on basis of NAV. Since the fund need not sell any of their holdings, carry won't be realized in the "traditional" closed-ended way. For example a fund might calculate carry every 2 years so for every LP capital drawn, the clock starts ticking upon day its drawn and after 2years (the excess performance over hurdle would be subject to carry for said LP). As such the economics of such an evergreen structure could be very lucrative when it's fully scaled, as carry would be paid every quarter.This is part of the reason why you are seeing so many evergreen structures in infra (BX infra, KKR, IFM) as the yield-oriented/long term contracted cashflow nature of the underlying investments make it less susceptible to huge drops in NAV - which in turn makes it a great cash cow of mgmt and carry fees.

 

This may be a dumb question, but under these structures where is the cash flow coming to pay out carry if it’s being calculated but the assets are not being sold? Or would it be the same for the GP in that they “earn” $x of carry at the time of calculation (e.g., 2 years in your example) but will only get paid out at exit or return of proceeds (i.e., some sort of dividend)

 

Great question and honestly am not too sure about funds with J-curve type investments, will let someone else shed some light. I guess in this scenario the carry could just accrue? That said, funds with open-ended structures tend to be more de-risked and will own investments that are cash-generative and yield-oriented, which lends itself very well to RE/infra with returns of 6-12%, coupled with periodic dividend payments. In these funds, the carry will obviously come out of as part of dividends.Also in the case of funds owning investments that are non-cash generative/with J-curve type profile in an open-ended fund structure ... that just seems like a recipe for disaster, as you are bearing liquidity risks from the part of the LPs, but your underlying investments are obviously NOT liquid + the NAV/performance of the investments are not backed by cashflows/dividends. 

 
Most Helpful

I left a fund w/ an open-ended structure so can at least speak about how it was done there. 
There was both a high water mark and a cumulative hurdle rate, and carry was paid on profits above whichever was higher. After aa few years of performance though, your NAV is usually way above the hurdle so only the high watermark matters at that point.
Carry was calculated and paid out every year but is paid in units of the fund rather than cash which helps if you don't have any divestments that year or cash from dividends. As an employee, you then could redeem for cash once a year after a minimum 3-year lockup. 

Interestingly enough, the fund did not have many cash-generating investments, and the type of companies bought were the same you'd see at a typical close-ended fund. I think the only reason it worked out from a liquidity standpoint is because the LPs have never redeemed capital since fund inception so there's less pressure to have cash available. Employees also tended to leave their carry invested in the fund rather than redeeming for cash, except to cover tax liability. 

 

Quis ullam eaque pariatur et debitis. Quia hic quis eum qui vitae.

Dolorem beatae itaque praesentium consequatur vel molestias odit. Et fugit et cumque voluptas.

Perspiciatis neque totam blanditiis. Ullam dolores dicta labore suscipit qui qui.

Excepturi qui tempora quasi eos aspernatur perferendis expedita. Assumenda sed itaque in ut sequi omnis tenetur. Asperiores at aut ab et ducimus ullam voluptas. Minus voluptatem aut consectetur aut laborum. Quo voluptatem ut quasi voluptas consequatur. Veritatis voluptas vel provident ut ea unde itaque.

Career Advancement Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 99.0%
  • Warburg Pincus 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

April 2024 Private Equity

  • Principal (9) $653
  • Director/MD (22) $569
  • Vice President (92) $362
  • 3rd+ Year Associate (91) $281
  • 2nd Year Associate (206) $266
  • 1st Year Associate (387) $229
  • 3rd+ Year Analyst (29) $154
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (314) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
GameTheory's picture
GameTheory
98.9
7
dosk17's picture
dosk17
98.9
8
CompBanker's picture
CompBanker
98.9
9
DrApeman's picture
DrApeman
98.8
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”