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
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!
Is the carry data presented here meant to be anual carry in addition to comp or total carry from day 1?
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.
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.
I think we’re actually saying the same thing. My point is that a 20% fund IRR obtained from a few successful early investments is not worse than a 20% fund IRR obtained from an even spread of investments throughout the life of the fund. Now the time period over which the IRR is obtained certainly matters, but that’s where the money multiple becomes important. My apologies if this is unclear — hard to describe my point precisely in a concise paragraph!
I agree regarding the tradeoffs of fund leverage. That said, I think it is important to keep in mind that institutional LPs that are investing in Private Equity typically only commit a small portion of their overall capital to the strategy. For example, there is an article from late last year that CALPERS is targeting an 8% allocation to PE. Given that 92% of the portfolio is invested elsewhere, including in cash and more liquid securities, CALPERS doesn’t need to keep a significant cash reserve on hand to ensure it can meet its capital commitments. Their PE money is allocated across tons of PE funds which are investing over a ~5 year period with constant inflows and outflows. The odds that all of their capital commitments will be unexpected called at exactly the same time is negligible, reducing the need to set aside meaningful funds.
Using statistics to sort of demonstrate this, imagine rolling a single 100 sided die (your capital commitment to a single fund). Whatever number you roll is the amount of capital the fund calls with just 14 days notice, and you have to be sure that you have the capital on hand within those 14 days. In any given roll, the odds of getting above an 80 are 20%, so you need to keep pretty much the full $100 of cash on hand at any given point in time. Now imagine rolling 50 dice. You can reasonable expect that the average of the 50 numbers shown is going to be -/+ 50 (I didn’t run the precise math). The variability is very significantly reduced. Translate this to a portfolio of capital commitments for an institutional LP. You can use statistics to very reasonably predict cash flow needs and minimize the amount of cash reserves necessary to meet your capital commitments.
Lastly, on the monitoring / transaction fees, yes I’m referring to fees charged to portfolio companies. I did a quick google search and while this paper is dated, it specifically discusses transaction fees and monitoring fees. Give it a read as it is an important way in which funds generate returns and something every PE professional (and senior bankers) should be aware of: https://docs.preqin.com/reports/Dechert_Preqin_Transaction_and_Monitori…
To your question on board seats, you are correct that no director fee is charged directly. However, the monitoring fee can basically be seen as an indirect way of charging director fees.
I agree with your math but I disagree with your conclusion. What you’re basically describing is a PE firm makes its first fund investment, which in year three produces such an obscenely massive return that the entire fund is returned before all of the capital has even been called. The PE firm then proceeds to make a series of really poor investments, losing nearly all of their money each time, ending up with a 1.6x gross MOM (remember, if one investment returns the entire fund, the remaining investments need to be complete wipeouts to end up at a flat 1.0x MOM). In my experience, the PE funds that are producing very high early returns are not the ones ending up at a 1.6x gross return by the end of the fund.
From the LP’s perspective, remember the LP has a portfolio of investments. PE investments account for perhaps 10% (see the CALPERS example above at 8%). This includes a mixture of cash, public equities, bonds, hedge funds, and a bunch of other things. I don’t work at an LP, but if the LP struggles to reinvest what will likely amount to 0.01% of their AUM that is returned earlier than expected... then I’m not really sure what to say. My intuition tells me that this isn’t an unreasonable expectation of the LP where its sole purpose as an entity is to manage a portfolio of both liquid and illiquid investments.
There is obviously no “correct” answer to the IRR debate, there is an argument to be made for both sides. I will say though that in the lower middle market, any fund that produces a 1.6x gross MOM is not going to be able to raise another fund. On the large cap or megafund side, there is also an argument to be made that there is not a better alternative investment when you have to deploy hundreds of billions as an LP.