Hypothetically which of the following would you take given two offers - assume other factors equal (eg WLB, culture, brand)
1. Cash Comp - $1M, projected carry $250k p.a (base case, no upside)
2. Cash Comp - $750k, projected carry $500k p.a (base case, up to $1mm p.a upside case)
I'd rather have the carry. The incremental $250k being taxed at a higher rate doesn't make a material difference in QoL vs the preferred tax treatment and a solid MoM (avg. 3x gross at my fund) which would be harder to replicate on my own.
Thanks - this is helpful. Coming off a bias to value hard cash more - but good point on the differential tax treatment
Cash is king. Bird in the hand worth two in the bush. Carry is variable, and it subject to clawbacks
TBH they're not so different. If you invest your cash comp attractively, you can generate higher returns than most PE funds in the current environment.
In a low interest rate environment (2-3 years from now) I would probably prefer the carry due to tax treatment and hopefully similar returns profile.
The cash vs. carry discussion at the midlevel (ie pre-principal) forgets the opportunity cost of not investing your cash comp every year, assuming you live a reasonable lifestyle without kids in Manhattan (ie can put away 200-300K cash comp p.a. into the market).
At most UMM/MF you’re basically stuck doing ETFs (no single names) and assuming you’re not doubling down into your own fund w/ co-invest - hard to beat PE returns* (asterisk being who really knows what actual PE returns are these days…)
At large cap, can do names. Also can invest in focused indices (eg levered semis, magic 7, etc.)
Who forgets this basic fact ?? In my cash vs carry discussion I demanded a healthy multiple for the carry vs every dollar of cash bc of this fact ie time value of money, as well as vesting, illiquidity.
Spirit of the question is cash today vs. upside. As someone who has waited way too long to realize carry I would lean towards cash (it is king)
When you peel the onion back, the question is a lot more complex: what is the capital commitment, is it levered, what are the leaver rights, what are your assumptions around holding period, clawback provisions, etc...
This is a tax question + requires firm specific info. But probably 2
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