Impact of Health Issues on Carry
Hey guys,
Quick question, I understand that if you leave to another firm before your carry vests you'll lose your carry. Would this still be the case if you have a health issue and would be changing jobs to something less demanding?
dude they're obv gonna find a way to f u over. they dont care
The question is a bit weird: you typically always lose unvested carry (“before it vests”), no matter the conditions of your departure. The question is what happens to the vested portion. There it depends, if you leave for health reasons then normally you keep it all, but you are at the mercy of the pot bellied gods at the top still (i.e. they can fuck you overc, they have all the discretion they want and good luck challenging them in court). Normally though, as despicable as the people in PE are, no one is greedy enough to fuck over a mid level professional because he got cancer. But who knows, maybe that is the next play in their personal value creation playbook.
Maybe it sounded weird because I don't fully understand how carry vests. I thought your carry vested all at once (say in 5-6 years) but you got your $ amount distributed over time. Does it vest gradually?
Here's how it works at a high-level, ignoring a lot of potential firm-specific clauses and nuances - you're allocated a percentage share of the total expected carry pool, usually quoted in "dollars at work." Total expected carry pool usually assumes a fund's MOIC is 2.0x and fully hurdles, so total carry pool is 20% x 1.0x size of the fund (2.0x total MOIC equates to 1.0x in terms of total profit dollars). Then multiply by your bps of carry, and that's your dollars at work. Dollars at work aren't fixed - if the fund hits 2.5x MOIC, for example, then realized carry/dollars at work actually materializes to be 50% higher.
Your carry also has a vesting schedule over a certain number of years. It can be straight-line vesting, or it could be front- or back-weighted (typically back-weighted). Under a 5-year straight-line vesting schedule, you vest 20% each year, so if you were to leave after 3 years, for example, you are 60% vested. Back-weighted could look like 10% years 1 and 2, 20% years 3 and 4, and 40% year 5. Vesting happens on the same day each year, so if you leave in-between two vesting dates, you aren't granted a pro rata vesting (leaving 6 months ahead of your vesting date, where you are due an additional 20% vesting, doesn't mean you get 10% vesting instead; you pick up nothing for the 6 months of the year that you worked, if that makes sense).
Our prior fund had an honorable leaver clause where if you died or were disabled your full carry auto vested. They got rid of that haha
That's pretty brutal, but nothing about greediness and PE seniors surprise me anymore.
did people abuse it? (use a light illness as an excuse to leave with the vested carry)?
You can always leave with the vested carry the point was you’d auto vest everything. And no I have never heard of anyone abusing it. You’d need to be permanently disabled which I guess you can find some doctor to help you run a scam but it’s not that’s straightforward
Why would the firm care? It's your health problem - they're already going to look for any legal way to conserve the constrained resource that is carry for seniors. If the exception isn't outlined in carry docs expect them to withhold anything not vested regardless of teh circumstance.
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