Comp / Carry in Private Equity vs. Credit
Currently in UMM PE in NYC and know of two peers considering a move to Private Credit. Some of the things they mentioned were stability/easier promotion path and more consistent carry. To be quite honest I have no idea if that is valid or what they mean. I have considered more family office investing as I do see path to partner difficult, but I would assume that is true everywhere.
Two questions: 1. How does career stability / promotion path differ across PE/PC? 2. How does cash comp and carry differ from PE/PC? a. How does carry even work in PC? What does the $ amount look like and payout/vesting cycle look like?
I
Bump
Didn’t carlyle and KKR just raise a carry-less PC fund?
It's just on their evergreen funds, and their returns on those funds are terrible. Problem with huge credit funds is that they have so much inflow of investment dollars that they have to basically say yes to every deal that comes across the desk which results in subpar returns compared to funds that can be more selective.
1. I would say career progression and stability would really depend from firm to firm, don't think there are that many specific differences when it comes to PE vs. PC.
2. Cash comp typically there is some discount to PE because of lower fees in PC, but carry it really depends on strategy and of course size of the fund. Direct lending funds typically charge anywhere from 10% to 15% carry, and so the carry pool is smaller in this case. But for distressed debt funds, carry can be 20%, and funds with top-tier returns like Cerberus might see lots of carry because their returns can be quite close to buyout returns. So on an absolute DAW basis, it is likely to be smaller + also the target returns for PC funds are lower. For DAW most PC funds would calculate it based on a conservative 1.5x fund outcome rather than 2.0x typically for PE.
3. Carry for PC funds are typically under a European waterfall, which means carry paid on a whole-fund basis. So the wording in the LPA might look something like this:
For distributions, first, the return of all cumulative contributed capital by the Limited Partner... (and so on, with proper legalese)
This is opposed to deal-by-deal carry, where the wording would be something like "return of cumulative contributed capital by the Limited Partner for the purposes of the investment... (with proper legalese, I am terrible with writing like a lawyer)
So the preferred return would be on the entire fund (all LP contributions). This is because PC deals typically see some cash interest coming back over the duration of the fund. There's a ton of cash flows in and out (especially if we include recycling of capital), and so a deal-by-deal carry structure is not feasible. Also even for PE funds a lot of funds in the US are shifting to a European waterfall rather than deal-by-deal carry, as is market standard in the rest of the world.
The implication for carry is that carry would be back-weighted, as a fund would typically be "in the carry" only in the tail-end of the fund life. All prior gross distributions = net distributions to the LP because the LP will probably not have reached the preferred return hurdle on all its capital contributions yet.
So yeah PC funds would have carry paid out at a later date and probably less carry dollars to go around, especially compared to PE funds which still have the luxury of having deal-by-deal carry. But there is in general greater certainty of carry. PC funds have more deals (more diversification) and also earlier distributions, which "locks in" returns earlier. You rarely see a PC fund coming in below 1.4x gross but a concentrated PE fund with 6 deals might suddenly see 1.2x gross returns if 2 deals go very very badly.
The answer above is great. And for special situation / distressed PC funds there can be meaningful dollars. However, for straight down the fairway PC, your personal underwriting when comparing compensation across strategies should ZERO carry dollars for PC. It is just too easy to have one bad deal in a PC fund where you take a meaningful impairment and the carry gets wiped out. I've seen it often, both first and second hand.
If the fund does a lot of minority equity along with its credit piece then that will improve the odds.
Bump
The difference is in PE you have the option value of getting really lucky and really fucking rich in a single blow out fund. Eg Apollo 05-09 vintage fund or some of these $15-20bn Thoma funds that did like 35% IRRs.
You never ever have that luck surface area in PC. The flip side is you don’t also have dog shit funds where you work for 5-6 years for next to no carry and your carry mechanism is an annual yield component, so you’re not waiting for your carry 5-7 years after the fund was launched, typically hitting much more steady and liquid.
Commodi non a quibusdam magnam aperiam. Consectetur quam sed suscipit numquam. Id distinctio atque et fugiat consequatur aut sint omnis. Et enim aut modi odio minima molestiae libero.
Qui nulla nam commodi ut. Dignissimos ut amet voluptate doloribus accusantium voluptatem. Quae explicabo velit qui ratione nostrum quam tempora. Voluptas illum architecto molestiae ipsam.
Sunt harum enim maiores a. Minus nulla commodi rerum nobis architecto accusamus. Provident minus atque aut ratione. Aut eos similique incidunt occaecati. Natus consequuntur voluptas consequuntur aliquid illo.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...