Do you guys really not expect carry to materialize?
Just started at a MF and I’ve seen a number of posts/comments on here lately that mid-senior folks in MF PE assume their carry dollars won’t really materialize into anything significant. Is this really true, or is this more of a way of conservatively budgeting so as to not be financially reliant on future carry? Don’t get me wrong, the cash comp at my firm is great and my motivations for pursuing this job aren’t solely for the money, but a big part of being an investor at a big PE firm is the carry comp. I was always told that carry is the “real” money, and the cash component is more so to cover your living expenses.
Obviously none of this affects my near term future, but if people really don’t see their carry meaning anything… there are way easier ways of making $1-2 MM cash in your 40s than being a MF PE partner, and that might affect what I choose to pursue in the medium-long term.
Based on the most helpful WSO content, here are some insights regarding the realization of carry in Private Equity (PE):
Timing and Realization of Carry:
Vesting and Legal Issues:
Variability and Unpredictability:
Impact of Fund Size:
Conservative Budgeting:
Real Experiences:
In summary, while carry is often touted as the "real" money in PE, the realization of significant carry can be unpredictable, delayed, and subject to various legal and performance-related factors. This conservative approach to budgeting and financial planning is a way to manage expectations and avoid over-reliance on future carry payouts.
Sources: Actually Realizing Carry, Confused about carry at PE Fund, Associates who started as analysts: Why did you stay in IB?
Honestly, the negativity surprised me as well. I can understand the "budget your life with carry as upside" mentality, but I don't see the point in hustling at this job if you truly expect the carry is worthless.
Strictly one data point, but I've been a beneficiary of slow and steady payouts. I received my first carry payout ~5 years into the job (inclusive of 2 years as associate) with payouts of varying amounts each subsequent year (hopefully with much more to come).
Where these payouts ballpark what you expected to get when you were an associate? Just trying to get a sense of what the 'haircut' is you should apply to carry figures you are given
Mine are actually better than expected, because carry is quoted on a 2x MOIC basis, and my fund is trending ahead of that (which is probably more feasible in MM than upmarket).
Why the negativity? If you are fired - you lose the carry? Or it’s because of something else?
I suspect it's some combination of (i) unfavorably long vesting, (ii) inability to achieve expected returns (where carry is quoted on a 2x MOIC basis and large/XL funds may struggle to realize returns of that magnitude).
I'm 6 years into pe (incl aso years) and nothing yet. Theoretically should receive the first small payment (low 6 figs) in next 6 mo. The first real payout should theoretically be in. The next 2-2.5 years. If I valued that as 0 I would quit immediately
If you don’t get carry for a while, meaning you are only dependent on the base salary?
And bonus. Which is mid to high 6 figures in aggregate.
Did this payment actually make it?
The low 6 fig materialized as 122k to be paid in q4 distribution. I was hoping for 2x that but here we are
For those of you receiving carry payments or expecting to receive them soon, what are your firms expectation of it being reinvested into your GP stake? I’ve heard others say it takes a long time for it to actually be spendable as your firm will expect it to be reinvested into latest fundraise.
Luckily we don't have a co investment requirement until you're partner
I think the increased trend for MM shops to give associate carry is emblematic of the firm itself admitting it's not very valuable. It's so far in the future and dependent on returns that obviously are hard/impossible to accurately predict, and also requires such a long term commitment to one company (and for them not to let you go), that it's just not worth depending on. I think it's worth it for folks who make it to the very top or who are the founding members of a fund.
I think some of this is why independent sponsors are becoming more common with the idea of never having a fund. There's plenty of "FoF" type of funds out there either dedicated to IS or that will have IS deals in them as well as allocators who have co-investment buckets where IS fit that there's a ton of appetite. Carry is realized in 3-5 years instead of eons like a traditional fund.
Carry to associates is not very valuable. $1 of carry for a VP is probably worth 3-4x $1 of carry for an ASO.
Can you explain what you are saying a little more?
This is why my goal is public company executive leadership. You get a stock grant with a 3 year vesting schedule and you actually realize it reliably.
I am a first year PE assoc now and I know 2 partners who are for sure house poor (spending close to as much as they make in cash annually on house payments, tuitions, trips, etc), thinking they are loaded from millions in carry 5 years out (mind you they are already approaching 50 y/o). Really want to pivot to public company ops.
Becoming a public company SVP, EVP or CxO is a significantly longer and tougher path than getting a principal spot in PE. And along the way as a non-technical person you get A LOT less in comp.
A VP at a public company is usually late-30s/early-40s and makes about what a senior associate makes. SVPs are typically late-40s or 50s and those spots have a huge “wait your turn” element to getting promoted into them.
Hard disagree... a competent person who is a CPA or finance background and plays the game can make this level. They may not be there at a mega cap name but there's literally thousands of publicly traded companies with market caps above $5b. Stick around 10-15 years and even if the stock doesn't do much you have $10-15mm in stock and if the stock does well that could be 3-10x that...Personally know several people in their mid 40s at boring, smaller S&P 500 names (non-tech) that own $10-30mm of stock (public filings). Cash comp is $300k-1mm a year and then $500-2mm a year in stock and stock has done well. Same thing as pilots for FedEx and UPS who are worth $25mm+ purely from stock comp and never selling (dumb IMO but worked).
Bump
This is the major downside of the large platforms today. Private equity is a game of musical chairs, only with a portion of the players never getting out of the seats in the circle. The pyramid (few people at the top, many at the bottom) works better when there's turnover at the top.
In the early innings of the industry, people died younger (hilarious how hard-living some of the earliest takeover titans were) or retired sooner (many of the guys doing this in the 80s were late-career and bowed out after a relatively short time).
Today, people claw their way to a partner seat over 15-20 years and never want to give it up. Which makes sense; when it finally gets good, why head out the door?
This means less of the pie is up for grabs. Carry allocations are lower, and that's before considering how onerous most structures are. Long vesting schedules, unkind leaver provisions, clawback (or buyback at cost), all of which is designed to maximize how much the 'house' keeps from you.
Couple this with the increasing compression of returns due to heightened competition and more efficient markets (show me the $100m EBITDA asset that is transacting in a non-banked process) and it's doubly ugly. The pie itself is smaller.
So if the pie is smaller and there's less of it to go around, what's the answer?
Two paths: find a smaller platform with better growth prospects, or go your own road once it makes sense.
The farther down-market you go, the more likely better returns become. There are more inefficiencies. You may in fact find a $10m EBITDA asset that has not yet been sponsor-owned. Any assets you find are more likely to have growth levers yet untouched. Multiple expansion is more likely. Inorganic growth is more likely to be accretive (multiple re-rating on the add-ons is more significant).
Down-market, you are also more likely (not guaranteed) to uncover leaner firms where you have more room to establish yourself, succeed in the vertical promotion journey, and enjoy carry economics at each level. Note that this is not automatic. There are just as many middle market firms that are crowded at every title, stingy with economics, and late in their own lifecycle that there are fossilized founders of the firm laying around coiled around the promote economics like Smaug. I'm saying that your likelihood of finding one that is newer, less crowded, and operated by people in a growth mindset is higher than in the upper middle market or megafund universe.
The other path is the independent route. I've written repeatedly about this on here, look at my comment history and sort by highest upvoted. You can decouple yourself from fund-dependent economics. This concentration is risky. It can also be remarkably rewarding. And once you have your first asset in hand, you can solve the concentration issue by pursuing others, each of which offers you uncorrelated economics. Your performance-based income is always deal-dependent, not fund-dependent.
I have $3-500K DAW but treating it like $0 until I see the cash in my bank account. To me it is a way to budget to make sure I’m not spending money that I don’t end up receiving. I do think our fund will do well, but it’s impossible to predict the ultimate returns. Gotta wait and see how we do. I’d rather be pleasantly surprised with a windfall than disappointed we only got a 1.5-2x because I already spent like we got a net 2.5x+ …
I agree with others in the thread. I wouldn’t stick around if I thought the carry wasn’t worth anything. It’s a great privilege to get upside and we are such a lean shop it helps that we are 100% aligned.
Who has a London/Switzerland/Germany PE perspective on this question? Is the London/Europe space any slightly different from the picture painted by the aforementioned comments?
My two cents -- I don't think people just mentally mark it to zero, but I do think the prudent ones don't take the DAW provided at face value and instead work it out at something more like 1.6-1.7x MOIC rather than 2.0x. That's far more likely. And the dollars get a little smaller and more realistic.
The other part of it is understanding just how much time might pass before you receive any carry dollars. 5 years? 7 years? 10 years? A lot can happen professionally and personally. You might not ever make it that long at the firm, whether due to personal issues or professional, it doesn't matter. So that's another part of handicapping the quoted DAW.
The negativity is a function of the current vintage
The 2014-18 vintage was gold and after seeing no real carry till then, it was crazy to see how much money was flowing at us
issue is the 2020-22 vintage where large funds were raised, assets were bought at peak prices (especially software) and since then interest rates have shot up, multiples have crashed and exits have dried up as IPO markets are shut and sponsor to sponsor trades are at deep value and there is no real M&A activity either
what most people don’t realise is that this is a cyclical industry (much like oil or commodities or real estate).. so you will not see any carry from the last set of funds which will not hit the carry marks (especially big tech mega funds like Silverlake, Vista, Hellman, TA etc)..
but that said I am very excited about the 2024/25 vintage because deals being done now are at assets with sober growth assumption, valuations and leverage assumptions where there will be upside 4-5 years out…
This is an industry for those who are long term greedy and you will make more money in your year 20 as a PE partner than the first 19 years combined.. key is to be consistent..
What about TB’s latest fund? Underwater?
The reason for the negativity around carry is a few things.
(1) You have to actually stay with the firm for years to get it. There are many reasons why one would leave before you actually get to the point where the carry gets realized. And the firm may let you go too. This could be due to you not being good enough or it could be due to factors entirely out of your control.
(2) The carry formula itself is not going to be a defined function for you until you are well into your career. It isn't like at a normal company where you have a percent-of-base bonus based on certain metrics which are normally lowball numbers that make it easy to meet. Carry is often a function of politics until you get far enough into your career/become important enough where you can clearly define in your employment agreement the specifics of your carry payout.
(3) Carry can often be expected to be reinvested into your GP stake. So you your first carry payout may be $1m, but you are expected to put,for example, $100k back into the business. That may not sound that prohibitive (because it isn't), but when you take the taxes off that $1m...
“there are way easier ways of making $1-2 MM cash in your 40s than being a MF PE partner”
That’s a very unrealistic view unless you mean going to MM where you can prob make lower end of that range. You will have to take on a whole lot more risk to make that much in cash elsewhere and it will be volatile year to year.
There are many avenues that lead to hitting a cap of $1-2M per year in your 40s and sitting there until you retire, with easier/less stressful hours than being a MFPE partner: private wealth management, commercial/real estate banking, equity research, management consulting, accounting at a big four, etc. It’s not really that presumptive if you consider the type of person who would be gunning (and has a legit shot at) for a long career in MFPE.
You can definitely make good money and live a pretty charmed life in those roles but it's wildly optimistic to think that there's a bunch of PWM/corp banking folks making $1MM+.
The AVERAGE MFPE partner is probably on the north end of the $1-2MM cash range and the left tail is very short. The worst MFPE partner is going to clear $1MM easy. You're talking about right tail outcomes for the professions you mentioned and ignoring what the path would look for a 25 year old today.
PWM - very right tail outcome. Possible yes, esp with a good network but getting to $1MM is not easy at all and this is a very disruption-ripe space.
Commercial/RE banking - going to be very up/down year-to-year but probably one of the better paths to $1MM. You won't get there before 45-50 though and the work is mindnumbingly boring most of the time. Can definitely coach your kid's soccer team though.
ER - there's prob 5-10 analysts max per sector who make that cash comp and the path to sr. analyst is a grind to get there and then a grind at the top. The guys that make much are always on the road marketing and talking with a bunch of slapdick pod analysts trying to figure out if TGT is going to get an extra 5bps margin off Circle Week and if other analysts have picked up on it. Pretty miserable iyam.
Consulting - prob best path esp for someone who wants to be in MFPE, make no mistake that it's still a grind but the same political animal who can be a MFPE partner can be an MBB partner
Would also add Sr Director or VP at FAANG - they are clearing $1-2M per year when including annual RSU vesting (which can be immediately sold).
A true Sr Director / VP role at FAANG is NOT an easy job to get at all.
Agreed it's not easy, but I'd guess it's easier (less work, less sharp elbows) than becoming a MFPE Partner.
Carry will eventually materialize for funds in the 2019 to 2022 vintage (for those that were prudent investors) a couple years into the next interest rate cycle imo (ie rates dropping to 2% and staying there for a period of time).
So I think we're looking at 2026 at the earliest, but in reality 2027-2029 will be when many assets from the COVID / ZIRP era are sold. This is because (i) they need more time to grow given the valuations they were acquired at, (ii) we will likely have a slowing economy before rates are lowered (even w/ a soft landing), and (iii) requiring the better interest rate climate as mentioned above. This will drive down IRR's on this vintage of funds, though I know sponsors are doing every they can to produce some DPI, mainly through div recaps.
Rates dropping to 2%? I'll believe that when I see it. Let's start with 3.5%, that'd be fantastic.
What manager is adding debt at 10% to send out a dividend to investors?
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