Is PE worth it? Can someone explain how carry works (BPS, etc)
I tried googling carry and how its calculated but I am still a bit confused. I understand that carry depends on the size of the fund, along with how well the invested company has generated returns over the projected period. But is there a common carry rate that is used among the UMM firms? Also, what is BPS and why is it mostly set at 25?
Sorry for the very nooby question, I am contemplating if I want to do IB or PE long term. With all of the raises IBs are seeing, I don't know if carry is worth it in the long term. For example, I would be giving up on an associates pay at an IB (along with any A2A sign on bonuses) just to be "demoted" to an analyst at a PE firm. I understand this is where carry comes into, but how exactly does it work and how long would it take for me to receive this carry on average?
Best case scenario is you go to a megafund that runs a shadow carry program for mid-level people. You won't get allocated anything until you are 3-4 years in, and you won't see cash for 2-3 years after that. If you are getting real carry the likelihood is that it won't get allocated until the later of (i) 3-4 years experience and (ii) a major fundraise. That carry won't turn into cash until the fund has had sufficient realisations to pay off the pref (if there is one) and start paying carry - this is likely to be 5-7 years. Tax treatment much more attractive on the latter in the US.
You can get very rich in PE but this is a 10-15 year project. If you have a short time horizon better to play for one-year options in IB or HF land.
Carry Workings
GP usually entitled to 20% of profit in excess of an 8% return. Often there is partial or full catch-up, i.e. the GP gets a greater share of CFs once the 8% preferred LP return hurdle is reached to "catch up" to 20% of ALL profit (not just the profit over 8%). Usually you need 200-300 bps of gross IRR over 8% to get through the catch-up, so as long as the fund is generating >12% gross you can ignore the pref.
Let's say it's a $20 bn megafund and it generates a 2x MOIC. That's $10 bn of profit and $2 bn of carry. One basis point (1 bps) of that is $200k, to be collected over the fund's realisation period (years 7-10 post raising). The allocation of the points will vary hugely between firms and also depends whether the GP is listed or not. It's not uncommon for mid/senior level partners to have 100+ bps, so they could make double digit millions off each fund if things go well.