To the experienced PE guys here – what are the latest market practices regarding compensation of foregone unvested PE carried interests by the new megafund PE firm you join?
I’m interested in actual data points when joining a megafund based in the US or Europe, for a VP/Principal position, when unvested carry is $1m or above.
What I’ve heard so far is that the new firm will indeed compensate for the forgone carried, however the modalities can differ regarding valuation and settlement method.
Valuation – Was the unvested carried valued on a money-at-work basis (i.e., assuming the fund will return 2.0x net to LPs)? Or on the basis of an expected final DPI outturn we need to agree upon, based on the extrapolation of the current TVPI, the GP track record, etc.? I’m ruling out a valuation equal to current TVPI only, as for a relatively new fund that would still be at cost or below the hurdle, this would mean valuing the carried to $0, which is not our scenario here.
Settlement – Was the settlement via (i) carried interests in the new firm’s fund(s), subject to a similar vesting horizon than the unvested carried, (ii) via company’s stock options or similar instruments for listed funds, (iii) simply via cash, potentially in multiple instalments subject to the continuation of the employment contracts over a given number of years, or (iv) a combination of the above?
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Fingers crossed that one of those helps you.
Why would they compensate forgone unvested carry? They just allocate you carry at the new firm no?
I think OP is including additional consideration in the new fund's carry in exchange for unvested carry as compensation.
That said, OP I think you are a bit too junior to get a significant buyout like you're looking for. The most common method is they give you a tick more of carry at the new firm, or give you some carry in the whole fund and not just from your joining point... I would prepare for a minimum 50% discount, likely more, on what you personally value your carry at - and many places are simply not going to compensate unvested carry for a midlevel. A $1M+ buyout is not likely for your level, and cash is definitely not happening unless you are a senior partner.
Obviously do your own valuation on what the carry is worth to you and negotiate as best as you can, but I wouldn't expect a massive buyout on this. They are not going to know what your fund is worth, so give them a quote with some support. It's usually latest mark. For a new fund, it's unlikely they will give you significant consideration on some future value the fund is currently nowhere near, especially if limited investments have been made.
That’s typically for vested carry is my understanding (and at more senior levels indeed). Unvested carry gets replaced by new unvested carry at the new fund? Why would someone pay you for something you don’t own?
Not the kind of feedback I was hoping for but thanks !
In the scenario considered, (i) absent any deviation from the legal docs the vested carried will not be forfeited so that's not the topic (the non-compete clause is not too restrictive), (ii) I suspect the new firm would not give as much carry as the old one for the same seniority level, hence the potential for a "compensation". Of course ultimately it all boils down to negotiation power / how much each party wants the move to be done, but the underlying philosophy would be for the new firm to say "Ok, we understand how much you would vest each year should you stay, we'll make you whole for this". The idea would be to avoid making the move totally irrational from a financial standpoint.
Think it’ll be a hard bargain unless they’re hunting you down for some reason and you’re also happy to stay where you are. You haven’t earned the unvested carry so I’m not sure why someone would pay you for it. Keeping all of the vested is pretty generous already compared to my docs
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