Hi all.
I am currently an Investment Banking Associate (1) at an Elite Boutique in Australia. I have approximately 4 years of Investment Banking experience. My currently base is A$180k and receive a bonus of ~80%.
I received an offer as an Investment Associate at a mid-market Australian private equity firm. The firm has 3 funds. The first returned ~4x net multiple and 40% net IRR.
The second fund (A$170m) is 80% invested and has returned ~50% of capital to investors. It is in year 5 of fund.
The firm last month raised its third fund (A$350m).
They have offered me the following package: - Base: A$130k - Carry - Fund 2: 1.00% - Carry - Fund 3: 1.25% - Opportunity to co-invest
No bonus or STI.
At the Investment Manager level (~4-5 years away), your carry is closer to 5.00% and you are looking at a ~$250-300k base salary. So it is likely that by time they raise Fund 4, my carry will be closer to that 5.00% mark.
So my question is, what do you think about this offer? It is interesting that they offered carry as a 1st year associate, however its a big step back in salary and with no STI, your immediate loss of income per year is ~A$180k.
So for ~3 years until you start receiving your carry, the opportunity cost of leaving banking would be ~$700k.
I find it quite hard to accept and immediate loss of income per year of ~$200k.
Why don't you run some analytics on some hypothetical numbers? Use assumptions for proposed fund returns over a given period, and apply your carry towards those returns to see your share of carry in each fund. The returns would likely have to be probability weighted because they're obviously not guaranteed. Once you get the total carry number, divide that amount by the number of years it took to realize, add the yearly carry amount to your base comp, and compare that total number to the comparable comp you would have received at every stage in banking.
I personally wouldn't go for this deal. The issue I have is that you are assured the certainty of losing ~200k a year for the uncertain gain of $X in the future. Losing the short-term incentive bonus for me is a deal breaker. In order for this proposition to make sense financially, the two sets of risks you're incurring ( 1) immediate downside financial risk offset by non-guaranteed potential future gains, 2) time value of money you are not receiving today) have to be offset by meaningful upside in total comp when you receive your carry. Basically, when adjusted for probability of success for reaching any give number in a year at your fund, your PE number with carry would have to be substantially higher than the number you would have received in banking, to justify the risk.
That's just the way I would think about / look at it.
Alternatively, if you're really set on PE, you can look at the short term financial loss almost as a sunk cost, in order to achieve meaningfully higher comp at some distant point in your late career. This approach would be based less on analytics and short term financial rationale, and basically more on taking a chance on your fund's long-term performance / your long term performance.