I've been curious for a while how PE partnerships are structured in terms of compensation. Do partners (real GP % owning partners) own a % of the GP and accrue a % of the carry every year? What are the vesting terms for ownership and how does that usually work out? Does a PE fund put a fixed % of the management fee aside for paying employees or themselves?
Really curious to hear from any PE/HF partners here on how partnership terms are structured.
bump
I'm no partner and I'm sure there are far more qualified PE/HF folks who can answer most of your questions but with regards to average pay, carry allocation, and other market comp questions based on fund size, you should check out the following report - https://www.heidrick.com/Knowledge-Center/Publication/North-American-Pr…
There are also different types of distribution waterfalls (European/American) that impact the timing of your carry payment during the fund term (again differs from 5 - 7 - 10 year period), American waterfall giving you access to carry payments sooner. Deal-by-deal carry and fund-level carry distribution may also be discussed in the GP agreement especially if funds may want to incentivize partners for investments they lead and sit on the board for - giving them a higher carry allocation for their deal (10% instead of 5%) and doing the same for other partners / most may stick with fund-level carry distribution for team morale purposes.
I remember reading an article by Morgan Lewis that talked about PE funds providing market base comp to junior folks while seeing some variability in base salary for senior folks and a major portion of the net profits (management fee minus salaries, travel, and other expenses) being distributed as bonuses to senior folks mainly partners.
Again, all of this differs based on fund size, strategy (VC/GE/Buyout/Credit/Infra/etc..), geography, and managing partner/CEO preference.
Thanks, super helpful!
To answer your question, a partner is typically paid in either 3 or 4 ways:
1) Base Salary 2) Bonus 3) Carried Interest 4) Distributions from their ownership of the management company (not the GP or LP)
Your question seems to be focused on item 4. The simplest way for me to describe this is that the management company is the entity that employs everyone and pays all of the ongoing costs of running the business (such as rent). This is the entity that charges a 2% fee on AUM (this is the 2 in the commonly heard 2/20).
Depending on how it is run, many management companies will have leftover cash at the end of each year. For simplicity sake, say you have a $1bn fund paying the management company $20m a year. The management company incurs $17m of cost, with $3m leftover. The owners of the management company can then elect to keep the cash on the balance sheet or pay out a dividend to the owners of the management company. While not the focus of this conversation, many people elect to pay out a dividend because money left on the balance will be taxed (this is an oversimplification).
At some PE firms, the management company is owned by very few people and they get massive distributions each year from the excess cash. In others, it is more evenly spread across the partnership. Ownership of the management company is a really challenging topic and is a source of the break-up of many otherwise successful funds.
Hope this is helpful.
Fantastic response. Is any carry reserved for the management company? Or is it typically paid out to partners based on performance? I just wonder if there is any carry set aside specifically for the management company (as kind of a "brand" tax).
Part of GP partner economics also includes a mandatory investment in the fund in an amount that represents a significant % of one's net worth (bigger % for first time fund / founding partners and smaller % for partners in large institutionalised funds where partner groups are larger).
Well said. People seem to think that partner cash flow is one way only.
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