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…

 

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.

 
Most Helpful

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.

 

I’m late to this discussion but for anyone reading this in the future:  It is absolutely critical that you have your carried interest in order and contractually bound (usually through the GP agreement). I have seen some very, very wealthy people attempt to screw over junior employees for literally tens of thousands of dollars just because they held the power and felt they ‘could.’ I don’t care how good a relationship you have with your boss or even if your boss is family, get everything in writing. This solves not only major disputes (such as getting fired) but also potential minor disputes — things such as what day vesting started for the new fund — was it the first close of fundraising? The first time capital was called? The date the first deal closed?

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