Co-invest and Carry: What happens if you leave the firm?
Can someone please explain their experience or broadly how separately both co-invest and carry works if you receive it let's say as an associate and then you leave the fund later on?
Is there a vesting period / would you be able to still be invested if you left or do you exit that investment immediately?
Thanks!
In a new fund, all employees will commit a certain amount of capital. That capital then gets called for each deal / equity investment. If you leave and the firm exercises its call, it will look to its most recent quarterly valuation and pay you the value of the assets you invested in. You have no further commitment to the firm / fund. If the firm does not exercise its call, no cash changes hands, you are required to continue to fund capital calls up to the amount of your commitment, and you are a no-fee LP in the fund until the fund is wound down.
Private equity is by definition closed-ended since its based on committed capital - you couldn't ask an LP for a perpetual commitment. Typical commitment periods are 5-7 years, with 5 years of harvesting after, so traditional PE funds are 10-12 years in length.
More relevant to these co-invest questions than fund period is the timing when the underlying fund assets are sold (3-7 years being typical LBO holds). When a PE firm sells an asset, unlike a hedge fund, it typically does not get to reuse that capital for a new investment (recycle period caveats etc.), but rather returns it to its investors. So if you leave your firm and your co-invest remains outstanding, that investment will be fully monetized when the firm sells the portfolio. And if you leave during the commitment period, you will need to continue to invest up to your commitment amount (which will come back to you when those underlying assets are sold).
If no call is exercised, you would need to stay in touch with the firm so that they could send you capital calls, wire you proceeds, and issue you K-1s. Like any LP, an employee co-invest comes with information rights. For administrative and privacy reasons, firms are likely to exercise their call right as they don't want to have to deal with what is often a five-figure commitment from a former associate.