How does Carry and Co-Invest work for PE Associates
I am joining a MM PE fund on the west coast that had a clause in the offer letter saying Associates “will be eligible” to participate in the firm’s coinvest program and carry on a deal-to-deal basis.
Should I start preparing liquidity so that when I start in early summer I can immediately participate in the coinvest program? Any idea of what the ‘minimum investment’ tends to be for middle market firms?
Additionally, is carry on a deal-to-deal basis different than carry that spans over the entirety of a fund? Which would be better or is that just dependent on fund/deal performance?
Any insight into how coinvest/carry works is helpful. The topics are completely new to me and would love to get a better understanding of what to expect.
Coinvest - expect to contribute ~30% of your take home over 3 years into the fund as a commitment [the investment period of most funds]. Most funds have some kind of a leverage vehicle with a bank so you get 2:1 or 3:1 etc based on whoever lends. Interest on these loans is usually due when distributions occur so not cash flow needed other than your cash portion of the contribution. If you base is $150 and they quote 1x bonus, total income = $900k, less taxes (lets say 40%) = $540k take home. 3-year take home - ~$162k cash contribution to coinvest. If they have a fund draw line, you'll only have to fund cap calls as that revolver hits its limit (fewer cap calls but higher $ amount).
Carry is allocated after the fund's expenses are paid back (management fees / deal fees etc) and preferred return hurdle is met (8% ish). Profits are then split 80/20 LPs to GP carry pool. Of that 20%, you'll be allocated a portion of the profit (at ASO assume ~0.5%-1.5% ish). This can be paid when distributions occur or deferred over a few years. Distributions usually get LTCG treatment which is nice, however your firm has to perform for the carry to mean anything... I'd take a look at your firm's gross/net IRR and MoiC. You can probably back of the envelope what carry was and how it would filter down to you within a standard deviation or 2...
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