PE Comp Question - VP / Principal Level

Hi all, wanted to market-check (and sanity-check) my comp to get folks' thoughts on whether this is reasonable or unreasonable. Apologies in advance for the long post… I'm a newly-minted principal (the only principal) at a sector focused fund in a secondary (tertiary?) city vis a vis financial services … think Nashville, DC, Raleigh, etc. Just raised a ~$150mm fund (2-3x size of previous fund). Averaging 2-3x+ MOIC, 20-30% IRR funds. 2/20 structure. We invest across the capital structure, from sr secured debt through control buyouts. 

Last year (as a VP / just before my promotion) I made ~$450k all in. Not getting rich off my base / bonus. About 2/3 of total comp was from base + bonus, with the rest coming from carry from an older fund that just got into the money. My total income was higher than $450k but the delta was from personal investments plus investments in the fund, etc. Expecting carry, across the three funds in which I have carry, of ~$5-6mm over the next 7-8 years. 

So here's the rub:  my carry in previous two funds is NOT governed by a GP agreement and there is NO vesting schedule. What I mean by that is:  the managing partner gets a big chunk of the carry paid directly to him via K-1s (his name is on the fund docs), whereas the rest of the carry goes to a separate entity and my carry (and that of the other two investment pros below me) comes out of that. So what happens is my carry runs through payroll (vs. K-1) so I'm taxed full freight. Major suck, but that is how it has always worked:  before I joined it was a revolving door of employees below the managing partner… I came on to replace the latest one, stuck it out, ascended, and we have since grown the team to include the other two investment pros. On the most recent fund, which we just closed, it's still TBD how that will play out. The managing partner knows my concern about this, but has talked about how he doesn't want to include names on the fund docs (other than his name) because "if someone quits or is fired then we have to amend the docs and that is a pain in the ass" or something like that. He did intimate that "I will like how it's structured" in this fund, but again I have not seen nor heard of anything pointing to anything being different from before… and all signs are pointing toward "status quo." Additionally, my phantom equity in the funds does not vest either. So basically if I leave at any point, I am leaving millions on the table in carry (and to a lesser extent, phantom equity).

Anyway, obviously one big concern of mine is taking it on the chin with regard to taxes on the "carry" that I have. That's real money being left on the table. The other concern is the lack of a vesting schedule tied to said carry. I am under the impression that it's pretty standard to have this in place. Am I wrong? The issue with this is - honestly - messaging. I.e., what message does this send to employees, or "it's kind of a big middle finger to us, right?"

I guess the big over-arching question is:  am I selling myself short working somewhere with this comp structure? Or am I being a bch since this partner built the fund ground up and can do whatever he wants? We are a very small investment team (three of us + managing partner) and we are very busy, all the time, with minimal / no junior support. Trying to grow the team but it's hard to hire folks. How hard do I push to change this (is it truly disruptive to the fund docs?) / at what point do I just say "fk it" and start looking around? I like what I do, the comp is solid compared to the local market, and there's a lot of upside… but the principle of the matter and the lack of clarity around this stuff really bother me. Thanks…

Comments (33)

  • Associate 3 in PE - Other
Apr 13, 2022 - 10:02am

No idea on market comp at this fund size as I play in UMM / MF sized vehicles, but I used to be a funds attorney.  There should be a carry vehicle specific to each fund raised that you would have an ownership stake in. Basically no-one should have their name on the carried interest vehicle, it should be [ShitCo Investment Fund III, GP] where the managing partner has a large stake in. 

LPs as they get more institutionalized are going to be more and more worried about this dynamic in the future.

  • VP in PE - LBOs
Apr 13, 2022 - 10:49am

Numbers look alright to me, although I eagerly await this year's Heidrick report. Yes, this structure is weird. Not a fund attorney or anything like that, but, at a fund with a nontraditional structure, I still have carry structured for tax-efficiency and coming in through K-1.

For what it's worth, at a prior fund that operated similarly to your shop, the managing partner would just fire people before carry got paid because it wasn't subject to a vesting schedule and you had to be there to get it. Caveat emptor.

  • Associate 3 in PE - LBOs
Apr 13, 2022 - 11:06am

As a data point, received a VP1 total cash comp offer of ~$300K with carry allocation worth ~$1mm assuming a 2x.  Fund size was ~$500mm, fairly market vesting schedule, with payment via K-1s for comparison.

I think cash comp is not crazy out of whack given the fund size but running carry through payroll and not having vesting just seems odd / signals lack of trust in the team he's built. Would have to weigh that against your carry allocation though. 

  • VP in PE - Growth
May 18, 2022 - 7:41pm

This is a reassuring post - I've been at my current role for about a year and have been very upset with comp… but my package looks very similar to yours with more weight on the carry. $500mm fund, cash comp at around $275k (maybe $300 if lucky, but doubt it), and carry worth about $5-6mm at a 2x over 5-7 years, not including the new fund we're planning in a couple years. 

My cash comp hurts, but it's been next to impossible to get management or the founder to understand what market means and I have a feeling it's a "just quit then" situation. See friends of mine making $400ish at $500-$1b funds and the pain, man…it sucks. Having said that, I've found my carry beats theirs 9 times out of 10. Who knows though. 

  • Associate 3 in PE - LBOs
May 19, 2022 - 8:58am

What sucks is that we're staring down the barrel of a recession and I don't know if the LMM side of the market is going to adjust comp up at this point - it is definitely starting to affect recruitment though IMO.  I turned down the comp offer mentioned above and know several LMM associates that jumped ship for other opportunities due to comp being way below market.  

Most Helpful
Apr 13, 2022 - 11:15am
JoeyJ, what's your opinion? Comment below:

I'm a bit junior to you, so take this for what it's worth, but I think this is a red flag and I would prepare to move firms in the case my push for change is unsuccessful. The managing partner's reasoning around the structuring of carry is ridiculous. Thousands of PE firms have been able to solve for the annoyance of "amending the docs". To me, what he's really saying / showing you is that he does not give a damn about treating you fairly. When you combine that with you also not receiving any vesting on your carry, you've got what would be a giant concern for me. This is a guy who doesn't view you as above the line / part of "the partnership" where you start to treat employees with some respect, and he is armed with the option of taking all of your upside for his own personal gain. 

I'd talk with friends about how their fund docs are set up, perhaps even better a lawyer who does this for many funds. Then I'd come back to your MP showing him how simple it is to solve the fund docs / carry taxation problem. If he really thought it was so complicated, you solved his problem. If he's still not willing to budge, I wouldn't be able to sleep at night knowing this guy could ax me just before my first carry check and I'd get 0 of the $5M+ for years of work that would have vested under a normal structure.

Apr 13, 2022 - 1:27pm
oldhead, what's your opinion? Comment below:

Fully agree with this. Both the tax treatment and vesting are way off market. You're taking a huge hit financially by having carry taxed as ordinary income vs. cap gains (at least as rates stand today). 

Almost every fund has solved this and it isn't complicated. Industry has also standardized around a relatively narrow range of vesting schedules (at vast majority of funds you are nearly fully vested after 5 years).

Would push back hard on this. 

Apr 13, 2022 - 11:45am
Analyst10242017, what's your opinion? Comment below:

Can someone explain how economics work? Are base and bonus being paid only out of management fees since carry is subject to clawbacks until everything is realized?

Apr 14, 2022 - 2:16am
boneappletea, what's your opinion? Comment below:

Yes, unless it's a very small fund like OP's, in which case the managing partner may be paying out of his checking account and betting on the fact that carry materializes

  • Principal in PE - Other
Apr 13, 2022 - 3:22pm

OP here. Thanks everyone for the insight. Alas, this is confirming my gut feeling. Fortunately, my managing partner has a track record of not blatantly f**king anyone over (e.g., firing someone before carry hits, etc.), but the messaging component is what irks me -- well, that and the obvious financial hit from taxes plus the precarious implication of the lack of vesting. Just completely at his mercy. As someone in my mid thirties, definitely do not like that feeling of dependency... 

So a practical question here... and maybe this is for the fund attorneys:  has anyone seen situations where the carry / vesting schedules aren't fully documented until the fund is closer to being in the money? (We do a European waterfall, FWIW.) Or is it de rigueur to have all this ironed out / executed / etc. at close?

Thanks again all, very helpful stuff.

  • Principal in PE - Other
Apr 13, 2022 - 10:39pm

Track record doesn't mean much if carry from fund 1 is only paying out. What happens if he starts not paying out for fund 2 and 3? If you start getting institutional LPs it will be a total red flag during DD that your name isn't in the carry pool. Believe me, money can do crazy things to people and I know many folks that thought they had great relationships with their MD and then they get FUCKED when carry is supposed to get paid. Respect yourself, ask for what you deserve, and if you don't get it, move on.

  • Principal in PE - Other
Apr 13, 2022 - 10:27pm

My fund isn't that much bigger than yours and I can assure you that you're getting a raw deal when it comes to carry. The very first thing I asked during the comp discussion (when interviewing) was how legit the carry was. You need to get your name in the carry agreement otherwise there is nothing preventing him from just not paying you, and believe me, it happens often. If I were you I'd demand your name in there and a proper percentage allocation and none of this BS - it is very easy to amend these agreements. He isn't doing it because he doesn't respect you and doesn't care if you leave, if he did, he would ensure you are properly protected. Sorry man.

  • Principal in PE - Other
Apr 13, 2022 - 10:47pm

I have personallt been F'd in a carry situation like yours and I have buddies that also got screwed. Protect yourself, don't trust anyone, get it papered properly.

  • Principal in PE - Other
Apr 14, 2022 - 6:04pm

You realize that a side letter won't give you capital gains treatment for carry right? The IRS needs to see your name with a percentage beside it on the Carry agreement. Anything other than this ain't gonna cut it

Apr 14, 2022 - 6:09pm
Mezz_Star, what's your opinion? Comment below:

Yup, you're right. I was thinking from a legal perspective just to lock in the actual interest and was ignoring tax consequences.  Punch line is amending the docs isn't hard and it's not uncommon to have the docs amended several times over the fund life. If the principal doesn't want to do it then it sends a loud and clear message. 

  • Associate 3 in PE - LBOs
Apr 14, 2022 - 11:12am

In case you need another echo to the points above: this new fundraising is a good opportunity to clean up the paperwork. Think about what you'd do for any portco execs - you'd want anything regarding their comp in writing so there's no arguments down there road. Don't take shortcuts just because you feel comfortable on the GP side. It's a fairly simple process for an extremely important part of your long-term earnings. If your MP doesn't think it's worth the hassle, then there's your answer

Apr 14, 2022 - 3:54pm
Premia, what's your opinion? Comment below:

Sounds like you've discovered why it's a revolving door of employees below the managing partner. You're probably not the first one to request changes to the docs.

  • 2
  • Principal in PE - Other
May 3, 2022 - 12:46pm

OP again. Sure, so basically I first just had to get my mind right. I.e., switch it from a position of fear (for lack of better words) to a position of "f**k it, I know I'm in the right, so if I raise this issue and it gets sh** on then that tells me all I need to know." So that gave me clarity / peace of mind. Then just blocked out like a half day with the partner, and talked it through. All good and he was very receptive. Even got some other things I asked for that will help make it a lot easier to build my team out. So I came out feeling a lot better for myriad reasons:  better comp visibility, better messaging around carry structure, better overall feelings about being valued, etc... 

Lastly, it's nice to be able to stop worrying about noise like this (important stuff to be sure, but noise nonetheless) and get back to focusing on my actual job...

May 3, 2022 - 2:28pm
CompBanker, what's your opinion? Comment below:

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May 18, 2022 - 11:33am

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