Carry Negotiations at a New PE/Growth Fund

Hi All,

Long time reader, first time poster.

I have spent the last two years working as the foundational associate at a first time PE/Growth shop. For 20 months I was the only junior member of the investing team (everyone else is a partner), and as such have completed all our materials, due diligence, modeling, and other "firm building" tasks such as orchestrating recent hiring processes. I'm now a Senior Associate/VP and about to enter negotiations to receive carry in our new fund ($200-$250m AUM, US focused), and I'm curious if anyone has a view on where to start negotiations.

For reference, my base salary is average for our fund size but my bonus is severely below market (usually <$10k) so the carry component is crucial in terms of upside. My gut says to shoot for >2% but I'm not sure if I'm lowballing myself here. Open to any thoughts / opinions.

Comments (6)

Sep 28, 2021 - 5:13pm
Smoke Frog, what's your opinion? Comment below:

I would start negotiations as 5% with your supporting arguments being that you worked hard with basically zero bonus for the last two years, are responsible for all the grunt work and want to start having your financial incentives aligned with the firm. Don't start with too low a number.

Most Helpful
Sep 28, 2021 - 5:32pm
mrharveyspecter, what's your opinion? Comment below:

Here's how I'd break it down. First of all, I would argue that you should be owed some portion of carry on the existing investments. It might be too late to actually retroactively grant you carry in the old fund, well perhaps not too late, but too much hassle for the partners, but I would think about what an small amount of carry in each of those deals would amount to, and argue that you should have retroactive phantom carry in those deals. As an Associate, somewhere between 25-100bps would be fair. If they balk at that, I'd ask for a meaningful bonus on those deals, enough to make you whole for prior missed bonuses that were lower. Not sure what you were getting paid, but assuming 250k or so should have been the all-in comp for those 2 Associate years. That's the first thing I'd think about discussing now that the fund has more $$ to pay you.

As far as carry on the new fund goes, it will really come down to how big the new fund is. A set % isn't quite the right way to think about it, as it will all depend on fund size. On a $250M fund as a new VP, the $ carry at work that is standard is somewhere between $1-2M on average. If I were you, I would argue for carry that at a 2x return, gets you to the upper end of that carry range. That probably puts you at around the 250bps range or so, which is fair. I'd probably start in the 3% or so range, which is a little high, but not unreasonable. Depending on what they come back with, I'd make sure to make the argument that you're really focusing on a carry dollars at work number somewhere in the market range and ideally a little above market given your contributions to the firm.

If you need specific comps, I'd reach out to recruiters and get them to give you ranges for similar sized/geo funds.

Sep 28, 2021 - 6:32pm
Mackerel, what's your opinion? Comment below:

Largely agree with Harvey's comment above.

That said, I think it's important to emphasize that you're very underpaid given your current annual bonus, and it's something you should mention. For negotiating the carry, I would work backwards from the all-in comp that you want (slightly above market). Additionally, when you calculate the value of your carry, I would suggest using a 1.5x - 1.75x fund return as this is a bit more conservative. Keep in mind that this is a new fund, and there's no guarantee you will 2x. At a 1.75x, you could probably argue for 3.5% - 4%. 

  • Principal in PE - Other
Sep 28, 2021 - 9:13pm

I have friends working at smaller funds, like you. 7.5-10% for Principal, 5% for VP, 2% for Associate. As you said, you don't have a bonus. Also, what are your vesting terms? How long is the fund life and when do you expect capital returned to LPs? What is the hurdle?

Sep 30, 2021 - 7:50am
acardboardmonkey, what's your opinion? Comment below:

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