Paying for Carried Interest Unit
My PE fund (Europe) make us pay to aquire carry units, anyone else in this situation?
Each carry unit is worth PS10,000 and gets allocated depending on seniority level then we get paid back at the end of vesting period. Do you find it normal? Sounds that carry shares are usually given as a bonus in the US.
That is not normal.
Carry vehicles are typically set up before a fund does its first investment so it has "no value" - you can't pay for something that has no value. This avoids any kind of taxable event.
However, if either: (a) the fund gets invested and is marked above a 1x before the carry pools are finalized or (b) you join the carry pools after they were initially created there may be a few outcomes:
Isn’t there a GP commitment required for each investment professional to participate in the carry pool at most firms? I guess that’s different from buying a “carry share” though.
No, that's a completely different topic and is unrelated to carry.
GP commitment refers to the partners commitment as a % of total fund size. So, if the partners invest $25m and the total fund size is $500m, GP commit would be 5% of total fund. This shows that the partbers have skin in the game, and it generally makes fundraising easier.
Actually let me rephrase:
Commitment on day 1 in the carry vehicle is PS0 per unit (or more if a participant gets hired later in the fund life). Then carry holders have to "commit funds" during the fund investment period until each unit reach a PS10,000 value.
My main question was regarding the requirement to actually put my own money to purchase a full unit of carry while it seems like most other funds just give them for free (when people say they get allocated xx bps of carry for exemple they seem to earn that as a bonus and not put any money upfront).
In my fund carry holders basically contribute to the carry pool at the same time as LPs gets called for funds.
Is that normal?
So, if you don't pay anything to enter the pool (the carry is marked up in value) you're diluting the existing unit holders value. For this reason there needs to be a payment, but the payment is always done as an equalization from the management company on behalf of the employee, never the employee himself.
Carry isn't a bonus. It's part of your compensation package and is expected at the more senior levels, otherwise people simply leave and join other firms that treat them better.
Your firm should be "buying" your entry into the carry pool for you via a note. The note can contain interest so when you are fully vested it reimburses the firm the small fee. You, however, should not have to pay for it. That's just not market.
Well I guess I'm getting screwed. Employees are paying themselves and the company is not buying anything for anyone lol.
For exemple, lets say a principal is getting hired 40% into the fund life, he gets allocated 10 units (that reach 10,000 value when fund is fully invested) so he has to pay 10*10,000*40%=40,000 when he gets hired (usually one year later when first bonus gets paid) then rest of the money gets called until end of investment period (say year 5) and he gets his money back+carry at year 10.
Investment team members are basically "investing" their own money in the fund with goal to generate some alpha (or a lot more than index funds return)...
Some people at my firm are taking loans to bridge their carried interest participation (we even have a partnership with a bank to structure the loan as bullet repayment).
Also, before reading WSO, it seemed more or less logical for me to commit some of my own money as it gives me an incentive to stay until the end of the vesting period.
Would be curious to know if any fund have the same structure as mine.
What do you mean you get “paid back at end of vesting period”? Carry pays when returns are calculated ie post (most of) harvesting.
Aren’t you confusing carry with co-invest? I don’t want to insult your intelligence but never heard of “paying to get carry”
I have heard of firms TRYING this on for size but never have I seen it implimented as no one in their right mind would buy into a carry pool as an employee.
The pay back is the equalization. It all nets out in the end, but you're short $$ upfront and take on unnecessary market risk.
Correct, basically advance payments in the carry pool until you buy your "full units". Funds get called at the same time as they do for LPs
Funnily enough I heard from our BO that the partners want our GP entity to start paying various registration and accounting maintenance fees for the carry pool as opposed to the corporation paying it. So while I have carry I am also paying down a small amount of debt/expenses to administer this POS. Not uncommon.
My shop has many business lines, including a fund of funds and I can't imagine we would ever pass your firm on our operational DD if we found out employees had to actually buy into carry. LPs want their GPs staff to be well compensated so they stay. The way your fund has it structured makes it fair for the senior partners (who definitely won't need to vest) while staff get screwed.
Well technically, carry holders are very well compensated at the end (long vesting period though). Carried is allocated to some analysts and all associates but only mandatory for principal and above. Definitely harder for me to keep some money aside to invest into carry than for someone getting paid a lot more.
It sounds like a small fund if carry is being allocated to analysts and associates. In my experience it is pretty rare for them to get carry unless they joined the firm at the inception or if it is a small fund.
Are you sure you're not confusing this with co-invest? Have the words carried interest been explicitly used or are you speculating that this is buying into the carry pool? First time for me to see this tbh.
Yes, investing in a carry pool linked to a fund. Word carried interest has been explicitely used in the contract I signed. Are you in the US or Europe?
Neither - Emerging Markets.
Been in the business for 12 years, first time to hear this. Well one's always learning in PE :) Sorry couldn't offer much help.
If this is the UK it may be due to tax laws for carried interest. It is an ongoing debate I believe and it might be easier to argue carried interest can be charged at capital gains tax rate vs income tax rate if some capital is at risk.
That's just simply not true.
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