How does carry work?
How does carry work and get allocated? Is it a percentage of the fund or a dollar amount? Do other people get diluted if you are given carry (e.g. new hires vs new fund)? Is carry given across different funds (e.g. if you join as a VP and there are 3 active funds currently)? When do you get to cash in on the carry (standard terms)? Tax implications of carry (Is it recognized as an asset and requires paying tax when granted even if its illiquid)? Feel free to add more details.
Thanks!
How does carry work and get allocated? Is it a percentage of the fund or a dollar amount? Either a % of the carry pool OR 'dollars at work'
Do other people get diluted if you are given carry (e.g. new hires vs new fund)? Usually there is an unallocated portion to allow for performance based allocation or potential senior hires.
Is carry given across different funds (e.g. if you join as a VP and there are 3 active funds currently)? Usually you get carry in the new fund, potentially the current fund but haven't seen / heard of anyone getting carry in prior funds that are fully invested.
When do you get to cash in on the carry (standard terms)? Usually years 7-9 but depends on how well your fund is performing. Don't count on anything earlier for your own CF modeling.
Tax implications of carry (Is it recognized as an asset and requires paying tax when granted even if its illiquid)? Differs by jurisdiction. Generally on capital account and tax paid on receipt of carry.
Thanks for your thorough answer.
The period required for cash in you mentioned (7-9 years) means that if I leave the fund after 2/3 years I won't receive anything?
I am asking that because most of the people decide to leave their fund prior to the 7-9 years period you're talking about.
Carry normally vests in 5y ie 20% pa. If you leave after 36mo for example you will be entitled to proceeds for 60% of your allocated carry, but of course only at the time the fund distributes performance fees ie 7-9 years from first close.
Btw on carry on invested funds: there are very famous shops which give “GP carry” ie carry on the manager which benefits from carry across all vintages still distributing. Base and bonus in these shops are ok the lower end of the range given this upside.
Assuming you meant that carry vests over 5 years on a straight line basis, how would there be distributable carry after year 1? At that point the fund is still working on deploying the majority of the capital, so how would they have any cash to distribute in the form of carry after year 1? Wouldn't it take a couple of years until they start to exit or return cash to LPs?
Also, don't they need to surpass a hurdle in order to unlock carry? How would they determine whether they had exceeded the hurdle before the fund closes and fully liquidates?
wonderin this too
You’re confusing two adjacent but separate topics. First, you get allocated a percentage of the total carry pool, which is a percentage of the profits (whatever and whenever they may be), and second, you vest a certain percentage of that allocation in accordance with your vesting schedule, which determines how much of that allocation you actually get paid (again, whenever and however much that is).
For example, pretend you get allocated 1% of the carry pool in a $1B fund with standard 2 and 20 fees, and you have a 4 year straight line vesting schedule (25% per year). That means if the fund invests the full $1B and doubles its money, there are $2B in total proceeds, $1B of which is profit. 20% of that profit, or $200M, is the total carry pool, and you get allocated 1% of that, which is $2M. You don’t actually get paid a dime of that carry until there’s actually money to distribute, which could be 5, 7, even 10 years from now - or never.
Now pretend you leave after 2 years - that means you’ve only vested 50% of your allocation. When the carry finally pays out (maybe 10 years later), you’ll only get $1M instead of your full $2M, but again none of it gets paid until there’s money to distribute. If the fund actually returns 3x, you would have gotten $4M but instead get $2M and so on. Whatever you don’t vest gets allocated to someone else (maybe new hires, maybe the partners that own the GP, whatever). Realistically the realization doesn’t happen all at once but in numerous stages over years 5-12 or whatever.
super useful, could you work through an example of how a comp package would work for a UMM PE VP? The carry and how does it work and how does it eventually convert to $?
Thanks!
Illustratively for a $1bn fund:
$500k base + bonus in cash
$2-6M carry "dollars at work", which is calculated as $1bn gain on fund (i.e., 2.0x gross moic) * 20% carry pool * 100 to 300 bps of interest in carry pool.
Some typical terms already described above for the carry is a 5-year straight line vest, and that deals that start and are realized during your tenure are fully vested.
I heard some firms are structured so the partners arw compensated even after they leave the firm, how does that work?
Vested carry
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