Carry

I am in a somewhat unique position as the second man in a PE fund (target $300-$600mm) for which my firm is about to enter the market. I spent 2 years in IB and have been at my fund for ~3 years now - my title is still Associate and we do not have a Senior Associate title. My review is coming up in a couple of weeks and I have not yet directly broached the conversation of economics in the fund. 

Does anyone have any advice on the situation? I will answer any questions you may have as well. I have a target in mind (by way of cash comp and carry DAW) but do not want to anchor by sharing this information upfront. 

Any comps from people in similar situations would be extremely helpful. 

Thank you so much in advance. 

 

Ah, navigating the choppy waters of compensation discussions in PE, especially when it comes to carry, is indeed a high-stakes game. Based on the most helpful WSO content, here's a tailored approach for your situation:

  1. Preparation is Key: Before your review, gather as much information as possible. This includes understanding the typical compensation structure for someone with your experience in a fund of your size and stage. While you've mentioned not wanting to anchor by sharing your expectations upfront, having a clear understanding of the market rate will empower you to negotiate more effectively.

  2. Highlight Your Value: Given your tenure at the fund and your position as the second man, you've likely contributed significantly to its current standing and future prospects. Prepare a list of your contributions, emphasizing any deals you've led or played a significant role in, improvements to processes, or relationships you've built or strengthened. Demonstrating your value explicitly can strengthen your case for a better compensation package.

  3. Approach the Conversation Strategically: When broaching the topic of economics, it might be beneficial to start with broader questions about the fund's plans for compensation structures as it enters the market. This can naturally lead into a discussion about your specific situation without making it seem like you're jumping straight to your personal compensation.

  4. Consider the Entire Package: Carry is a significant part of compensation in PE, but don't forget to consider the entire package, including base salary, bonus, and any other benefits. Sometimes, there might be room to negotiate on these other components even if the carry discussion is more rigid.

  5. Seek Advice and Benchmark: While you've asked for comps here, consider reaching out to mentors or recruiters who specialize in PE placements. They can offer valuable insights into compensation trends and help you benchmark your expectations more accurately.

  6. Prepare for Various Outcomes: It's crucial to go into the conversation with a clear idea of what you're willing to accept and what your next steps might be if the discussion doesn't go as hoped. Whether that means considering other opportunities or focusing on specific milestones to revisit the conversation in the future, having a plan will put you in a stronger position.

Remember, the goal is to approach this conversation with a blend of confidence in your worth to the fund and openness to understanding the broader economic considerations at play. Good luck with your review!

Sources: Rising Junior Losing Hope and In Need of Advice, The Work Always Gets Done, F*d up my career badly and depressed - need advice, Selfish Ask for Help in Situation, I need your advice

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

Going to need way more details if you want people to be helpful.

What was the size of Fund I and how many staff were there.

What city is this

What is the investment strategy

Is this truly a fund or more of an independent sponsor model

Do you have an anchor lined up or are you going to the market without any capital.

 

Thank you for your response - figured this may be the case but do not want to doxx myself. My firm has a couple different strategies. Responses follow:

  • Fund I Info: This will be Fund I dedicated to this strategy, though we have invested in this space for a decade or so. I expect we will hire 1-2 associates to help deploy the capital. No more VP+. Firm has $2-5bn AUM.
  • City: Tier 1 city
  • Strategy: Don't want to disclose specifically, but it's analogous to a buy and build in a niche sector
  • Fund or Independent Sponsor: True fund, typical investment/harvest period, typical fee structure
  • Anchor: Would rather not disclose to the extent possible

Look forward to your response. Thanks again. 

 

FWIW, I have been and will continue to be heavily involved in LP conversations during the raise. 

 

During review, would just suggest you broach the subject by saying you're committed to the long term success of the firm (and assuming you're all on the same page), ask if they have given any thought to economics given pending fund close. Everyone knows carry is what you play for in PE, so nobody will be surprised by this question. You may get the "haven't given it much thought", in which case ask them to do so and get back to you. Alternatively, maybe it brings up a more fruitful discussion.  

 

This is extremely helpful guidance, thank you. I will do this. Regardless of whether they punt on specifics, is there a rough DAW range you think I should seek? E.g., 25th / 75th / 90th percentile outcome? Thanks again (+SB)!

 

For the benefit of the forum, I am receiving feedback from my contacts in the industry that my ask should be for 5-10% of the pool.

 

So let me get this straight. Your industry contacts told you to ask for 5-10% of the carry pool on a ballpark $300-$600M fund. And you are a 3rd year Associate, that will likely be a Sr. Associate in short order. For a fund that size, I think that’d be a stretch even as an experienced VP unless you were a rainmaker or taking a very large haircut on short term cash comp. My friend, you need new industry contacts.

I’ll also add that in situations like this, it’s important to step back in think about how replaceable you really are. If they are preparing to fast track you to VP, and there is no senior associate level, I think maybe 5% of the pool could make sense if you’re that important. I think asking for anywhere near that as a senior associate is a bit ludicrous. 

 

Haha - I appreciate the feedback. I agree that I need to reassess how integral I am here. There is a dynamic that exists in my specific situation that I believe creates a strong moat (but I will reassess regardless).

 

Echoing this - if you ask for 10% as a starting negotiation point, as an associate, they might fire you on the spot…. You really need smarter industry contacts because their advice is worse than a 0/10 rating, it’s like a -5/10… that’s how bad it is.

I’m at a bigger firm that’s been around awhile so take this with grain of salt BUT here’s an idea. Maybe ask for ~$3m DAW for your go-forward comp. If you are really driving the fundraising, consider testing to see if you can get a one time payment if xyz number is hit for fundraise. Your larger AUM should give them enough cash to do this. Sounds like your responsibilities are outsized for an associate but they won’t want to give you 10% of carry due to obvious reasons and also the future headache that will cause if the strategy scales…. Can use the one-time payment to make you feel better/ reward you for current responsibilities without baking in too much go-fwd drag on the overall carry pool. Just an idea.

 

Thank you - this is something I’ve really only recently realized is important. Historically, I’ve relied on the quality of my work alone without doing much perception management, but I’m increasingly seeing how important it is to make it known what you’re accomplishing.

 
Most Helpful

My view aligns with those of your industry contacts. As you mentioned, you are uniquely positioned and should seek unique economics (i.e. outsized) for your level. The people I know in the industry that have really gotten ahead have been in a situation similar to yours and fast tracked themselves through leveraging their position regarding title and economics (i.e. full partner in early 30s, chunk of carry pool and even management co). That said, I do have questions:

- When you say that you are the second man, is it literally just you and a partner?  I took your comment to mean you are launching a new strategy within an existing platform. Why were you chosen for this strategy vs. someone else?  Do you have unique sector/strategy experience? 

- Who controls the management company, do you know the breakdown of ownership? How influential is your partner in the firm?

-Are there overlapping LPs to the existing firm, or new LPs. If you are not developing any unique LP positions along the way then that would entail less value to me

Given that this is a new fund / strategy you are taking risk here, and you should be compensated for that risk. I think 5 points is bare minimum here. 

 

+SB

Thank you for your response! I am going to try to answer as best I can without revealing too much about myself for confidentiality's sake. 

  • Day 1 will be: Partner, me, and one other from within the firm - this other person will be only partially involved and more so on the ops side of things whereas I will be fully dedicated and running point on the investment process. I was chosen for this strategy because I am most familiar with the asset we currently own (aside from said Partner). Further, there was a departure above me which allowed me to take on a ton of incremental responsibility and I have delivered excellent work for this Partner. I have been working in this niche space for 3-4 years. I think I mentioned this above, but we'll probably hire 1-2 ASO under me to help with execution.
  • Yes, I know the breakdown of ownership. My partner was one of the four founders and for anonymity's sake, let's say the economics are equal. Management co economics for me are probably a nonstarter at this stage. 
  • The vast majority of LPs will be new. A few may roll (let's assume <10% of the new fund is existing LPs)
  • Further, I may have said this above, but there is another more established and scaled strategy within my firm. I would be plug-and-play here as well, with meaningfully less career risk. If I choose this riskier route, I may close that door. 

I very much appreciate your feedback and look forward to your response as I refine my strategy for the discussion.

 

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