Employee co-invest into the fund: fee/carry-free, but vests
Hey all, quick one π
My PE firm offered me the chance to co-invest into our own fund on GP terms β no management fee, no carry. Nice perk, obviously.
The catch: it works kind of like vesting. If I leave the firm, the unvested portion of my investment flips to normal LP terms, meaning I'd effectively pay fees + carry on that part. Vested portion keeps the GP terms.
Anyone dealt with this / seen it before? Two questions:
- Would you say this is normal / market standard?
- How's it structured at your shop β does your co-invest (or GP commitment) come with any leaver / vesting mechanics, or is it just fee-free full stop?
Trying to gauge how common the "co-invest terms vest with tenure" thing actually is. Cheers
Iβve not seen the fee flip before so definitely wouldnβt say itβs market. At our shop, we make a commitment on a fee free basis and if we leave, the amount of capital called stays in on a fee free basis but you wonβt receive further capital calls post departure.
Whatβs the leverage on it (and is it non-recourse)? Without that I wouldnβt consider co-invest an obviously nice perk, even without the fee flipβ¦
People forget how great the S&P500 is without fees and without locking up your capital for a decadeβ¦
Agree, I know we debated on other threads, but Iβve only seen fee-free carry for employees (with no strings).
Agree that leverage / loans add another wrinkle, same with departure.
Also depends on framing. Above poster is a βI donβt get toβ continue co-invest if I leave; Iβve more often seen βdo I have toβ continue if I leave, given it can often be a material post-tax commit and may stack alongside another commit at your new job. Plus, your firm will have to find other colleagues to backfill your commitment (given GP commit is locked).
The idea that your own investment has to vest and is subject to clawbacks is absolute HORSE SHIT. You are effectively an LP if you're putting your own money into the vehicle and should be entitled to the same rights they are. Maybe there's an argument to be made if there was a vesting component tied to it being fee-free e.g. you invest and if you leave before X date Y% of the funds become subject to fees. But they're saying if you leave before X date Y% of the funds themselves are transferred from your ownership to their LPs? What the actual fuck?
No, this is not market standard, in fact I've never heard of any fund proposing something so ludicrous. Fee-free co-invest is fairly common (particularly in the mid-market), but taking your self-invested dollars away from you for leaving? I'm not sure how that's even legal if you decided to challenge it... What if you're let go vs making the choice to leave? Do they still get to take your money to add insult to injury?
I wouldn't touch terms like that with a 100ft pole unless those and other questions are clearly laid out and you see yourself staying at the firm for 10yrs or more...
Heβs not losing the equity he puts in if he leaves. Heβll just have to start paying fees / carry as the other LPs do
Agree
Iβd suspect carry docs (if you get there some day) have some similarly tough and creative conceptsβ¦
Either OP updated the post since I commented with corrected terms or I've been working too much/late recently and was hallucinating a fund looking to gut their juniors. I could've sworn it read he was having to cede a portion of the investment itself if he left early, not just that it would flip from fee-free to fee-drawing (which I've seen, it sucks but isn't unheard of). I've witnessed some pretty heinous terms but that would've been so egregious that's why I reacted the way I did haha
Wouldn't say it's standard, but it does has commercial rationale in aligning incentives. As long as there is a difference between leaving in good terms vs. bad terms (excluding sickness/parental/etc.) + it's prospective for the unvested period + you also check and understand all the economic clauses and implications, I think it's okay.
Not market standard - you keep the same fee-free coinvest is you leave at my fund. They just have a clause that they can buy you back at NAV if they want, but given they are lying upwards on the NAV I'd say that is not an issue.
As someone that regrets co-investing into their fund, donβt do it. Itβs not worth it
Why do you regret it?
Keep in mind itβs also a signal to your firm - if you decline to participate (when most others take it), it throws a yellow flag to your firm re: promotion, loyalty, firm buy-in, etc.
Iβd caution again just skipping.
Iβll be curious to hear the rationale above, but if you donβt want to co-invest, that implies you donβt believe in your firmβs investments or donβt see merits in putting your cash in the PE asset classβ¦so why work at your firm?
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