Using the Heinrich and Struggles Private Equity Compensation Report, I've compiled a data sheet of the lower quartile, average, and upper quartiles of both annual salary and carry in PE. This data covers firms with under $500MM AUM to over $40B AUM, and also covers every level from associate to managing partner. All compensation figures are in thousands. I hope this is helpful!
Format:
Title
Lower Quartile Annual Comp | Average Annual Comp | Upper Quartile Annual Comp
Lower Quartile Carry | Average Carry | Upper Quartile Carry
Note: Italicized numbers indicate that this data point does not include data from the largest firms due to no survey responses on the H&S report.
Associate / Senior Associate
191 | 233 | 278
403 | 1159 | 1362
Vice President
339 | 405 | 436
1632 | 3511 | 4700
Principal
510 | 631 | 715
5068 | 10497 | 14169
Managing Director / Partner
760 | 1058 | 1230
11651 | 26294 | 31758
Managing Partner
1068 | 2719 | 3555
46840 | 66670 | 79750
Bump, cool data
following
I would never have imagined that principals get so much carry
what is the typical time period for vested carry
I'm not sure about this one; it never explicitly stated that in the report. However, I'll paste a response that CompBanker made on a different thread that will hopefully clear it up a bit more.
Carry is allocated on a per fund basis. Every time a new fund is raised, those who are participating in the carry will receive their carry grant which will be more or less fixed through the life of the fund. Using the industry standard parameters of a 2.0x return and 20% carry fees, you can pretty easily calculate the expected carry payout over the life of the fund. Nothing controversial here.
The difficulty arises because new funds can be raised every 3-5 years while a typical fund lifespan is about 10 years. This means that almost all senior professionals have carry dollars at work from multiple funds simultaneously. Due to this overlap and the variability in timing between fundraises, there is no way to come up with a definitive annual number. As a proxy, I like to calculate the expected carry payout and divide by the number of years before the next fund is raised.
Here is an example. You have a $500mm fund and 5% of the carry. A 2.0x return suggests $500mm of profit to the LPs, $100mm aka 20% of which goes to the carry pool. You get 5% of the $100mm so your expected carry payout over the life of the entire fund is $5mm. The next fund is not going to be raised for another five years so you divide the $5mm by five years and your annual carry value is about $1mm.
Fast forward to five years later... the fund raises a $750mm fund and you get a new grant of 4% of the carry. Doing the math again, $750mm of expected profit at 2.0x which equates to a $150mm carry pool. Your 4% is therefore worth an expected $6mm. Divide that by five years and your annual expected value is about $1.2mm. Congrats, you just got a fictitious $200k raise!
Thanks both! I imagine 5 years too
really dumb question but when you get carry do you lose it if you leave before the fund is fully harvested? because if that’s the case, at any given point in time aren’t you leaving significant carry/monies on the table?
From data I’ve see. It’s 4-5 year median vest
Is the carry data presented here meant to be anual carry in addition to comp or total carry from day 1?
This is the projected total carry (over many years) from all funds for that professional.
From the H&S report: "Carried interest is calculated using “carry dollars at work”—the expected return on total carry participation across all vehicles, based on achieving a net 2x return (above hurdle and after fees) "
Thank you, that clears it up.
Usually the hurdle is just the hurdle, once that is achieved, can be ignored. Amount of carry is not affected by it though usually in the distribution waterfall, LP gets all the distribution till hurdle is met, then GP gets all until GP/LP is even, then it's a 20/80 split of all profit.
Some firms manage to negotiate no hurdle - KKR / Warburg, but management fees are lower.
I assume it basically means, what is the aggregate amount of carry dollars at work across all funds at the principal level. I'll give you an example based on my personal circumstance:
Right now, I have carry dollars at work across 4 funds.
Fund I - I was given an allocation as a Senior Associate / Vice President. While that allocation was given to me almost a decade ago, it still isn't 100% paid out because there are a number of investments left in the fund. It is mostly paid out though.
Fund II - Larger allocation as a Vice President. This fund has only just started paying carry.
Fund III - Big allocation as a Principal. This fund won't start paying carry for a couple more years.
Fund IV - Another big allocation. This fund won't start paying carry for probably 5+ years at a minimum.
Add all of that together and you as a principal it isn't surprising to see $10M + in total carry dollars at work. Unsurprisingly, it is easy to be worth a ton on paper and still not be able to afford a multi-million dollar home, particularly if you have a wife and kids. Remember that I also have capital commitments towards all four of these funds -- so every time the fund calls capital, I have to write a check.
Thanks for sharing this, extremely helpful. A few follow up questions:
How does your capital commitment work, is it the same % as your carry percentage, ie if you have 5% of the carry of a given fund then you put in 5% of the GP commitment each time there is a new investment or is it done differently?
Have you seen any funds that do deal by deal carry or is this much less common?
The capital commitments you refer to are from your co-investments, not part of the GP contributions, right? Unusual for a principal to have to participate in GP contribution.
I would love to hear some more senior opinions on this post, so I'm going to mention some WSO users. Please follow with more if you have someone else you want to mention. APAE CompBanker
Yup, uncontroversial and in line with what I’ve seen for VP and below. Tad surprised at principal cash comp being that low - but this is the best estimate we’re gonna get I suppose
Agreed, although with carry they get to about $1 million annually on average.
Cash comp for principals (pre-MD / partner level) at large funds should range between $600k - $900k. As one would expect, moderate base + high year-end bonus is the norm.
Carry would vary and is subject to negotiation at that level. VP and below would be more standard.
so the median MD in PE is making $1.1 million cash + 26 million carry? What does $26 million represent, $26 million over 5 years? 10 years?
To the layman, I'm supposed to read this as the median PE principal is walking around with $10.5 million illiquid net worth in his personal excel net worth spreadsheet, that is only ballooning each year due new funds raised + new carry earned + distributions being made (increasing their actual liquid net worth)?
Most PE MD I've ever met owns a $2 million house in Greenwich yet they supposedly have close to $30 million in illiquid net worth tied up in the fund at any single point in time plus likely a substantial liquid portion?
What a useless survey, they should have asked senior PE professionals what total dollar value over last 3 and 5 years did you receive in carry distributions for principals and up and annualized that figure instead of floating 8 figure cumulative carry to make investment banking analysts interviewing for PE roles foam at the mouth.
yeah the associate number showing 1000-1500 or whatever is a big ??? haha
IF they get carry at that level, it’s usually in the 1-1.5mil context max. so that is accurate
I agree with this. I personally would love to know what the all-in comp is for 1st 2nd and 3rd year associates at UMM funds or MFs. To my knowledge you rarely get carry at that level. Anyone know?
As far as I’ve read, it seems that associate carry is pretty limited in most funds, and MFs usually don’t have any associate carry at all.
Based on the survey, only associates from LMM firms get carry.
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2x net is nowhere near the median actual fund returns. It's more like 1.4-1.5x, which means these return assumptions on realized carry are likely overstated by a very significant amount.
One thing even I personally don't understand with the lagging return profile of PE, LPs commit say $500mm to a fund with a 8% hurdle. Once you reach that hurdle, the next 2% of return goes straight to the GP then after 80/20 split. A $500mm fund never invests a full $500mm, usually ~$425mm (+/- $25mm) plus the remaining ~$75mm left over for mgmt fees over life of fund, fund fees, dead deal break fees/other transaction fees and maybe some leftover for add-on investments to existing portfolio companies etc.
With those assumptions, if the median PE fund is returning ~1.4-1.5x net over 5-7 years, that doesn't seem to leave much if any dollars available to the carry pool...i.e. a $500mm fund, $400mm actual invested would need to be worth at least $735-857mm over 5-7 years (500 * 1.08^5 or 1.08^7) until GP sees its first dollar of carry, which at that point would be a 1.47-1.71x net return (735/500 or 857/500).
It doesn't feel like PE funds are investing and divesting over a 5 year period, so 7 years is more accurate (if not more) meaning the hurdle rate significantly inhibits any realization of carry to the GP if their returns are actually more in the 1.5x range vs. 2.0x range. I see this in distressed drawdown funds my own HF manages, the hurdle is set at 6% but since distressed has been a poor returning asset class, there's not as much performance fees to go around vs. our 0% hurdle HF performance fees. I can't imagine PE is so different from our drawdown funds if the return profiles of PE are actually declining / not as great as people seem to claim.
The only thing I can think of is if LPs are signing onto 8% IRR hurdles which can be fooled based on timing of an investment (you can generate an artificially high IRR if you get a massive exit soon in the fund then later crap the bed with portco realizations).
A few clarifications here:
Carry is typically calculated off at 2.0x gross, not net. I agree that 2.0x net would be a stretch but that isn't the industry norm for determining "carry dollars at work" in PE.
When determining IRR for a fund, the firm basically looks at the total and complete set of cash flows over the life of the fund. This includes calling capital for management fees, failed deal expenses ... everything. The result is that IRR is a reflection not of committed capital but rather called capital. I personally think this is an appropriate way of measuring PE returns, but I've also had friends present counter arguments. This means that the IRR penalty for taking many years to invest all the capital is not so bad, as the majority of capital is only called when it is time to make investments.
Your calculations are missing a very important part of the equation. PE firms charge transaction fees as well as monitoring fees. Depending on the way the fund is structured, up to 100% of these fees go back to the fund. In the LMM (not sure about the larger funds), these fees can be so meaningful that they completely offset the 2.0%/year management fee. For example, if you have a $500M fund charging 2.0% per year, that's $10M of annual fees that would be included in the IRR calculation. However, if you have up to 10 portfolio companies, each charging $500k a year in monitoring fees, plus transaction fees of up to $1.0M per deal, you can essentially negate the impact of the 2.0% monitoring fee completely. This is a regular practice in PE and makes the return hurdles a lot more achievable.
You mention the IRR hurdles can be "fooled" based on timing of an investment. As the IRR is calculated based on actual capital called and actual capital returned for the entire fund, I'm not sure why LPs would care if it came in the form of one very successful early investment with a handful of drawn out duds? If a fund generates a massive return early on, the LP is free to invest that returned equity into the public markets, a hedge fund, another PE fund, or wherever else it chooses. Unless that money is just going to sit in the bank for years, the LP shouldn't be meaningfully impacted.
Timing of distribution certainly matters to fund IRR. As we all know, funds invest in the first 4-5 years of their lives, but exits don’t have to wait till year 6. If you invest $1 in year 1 and exit for $10 in year 3 - that apparently will be a huge help to total fund IRR. For LPs, if they look at return on a fund by fund basis then this probably doesn’t matter, but if they think about it from an annual capital contribution / distribution perspective then it does, I suppose.
Fund leverage can help IRR a lot as well while not necessarily a good thing for LPs since they have to keep the committed capital available somehow.
Re: monitoring / transaction fees, you are referring to fees charged to portcos?? This sounds pretty strange to me and I wonder what the logic is... KKR Capstone or TPG Ops group may charge portcos some fees but only when they provide a service - and I don’t think those fees go back to the partnership. Similarly, we take board seats, but don’t charge director fees do we?
https://www.mckinsey.com/business-functions/strategy-and-corporate-fina…
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