Private Equity Secondaries Associate Offer Review
I just received an offer as an Associate for a first time GP-led secondaries fund ($500mm fund 1 raise) and the firm put out the following offer
Location: Non NY/SF HCOL (Boston/Chicago)
Cash: $200k
Carry: $400k DAW (comes out to 100 bps on a 1.8x gross)
I'm just wondering if this is an appropriate offer for the role? Should cash comp be higher? Or carry?
For buyout funds, general calculation is to assume 2.0x gross for carry DAW calculation but what about for secondaries funds?
Curious to hear others thoughts but that sounds pretty solid to me.
Goes without saying, heavily vet the partners’ backgrounds - some of these GP-led only funds have been a struggle to raise. I do suspect that will change over the next 12-24 months though.
Thank you. Why is that the case by the way? Are LP led secondary funds easier to raise?
LP-leds have just been around for longer and therefore the strategy is more proven. The more successful dedicated GP-led funds to date have mostly been with firms that are already established within secondaries. I don’t think this will always be the case, but in the current stage of the secondaries market’s growth (and the current state of the broader fundraising market) I think funds that offer both strategies but tilt LP-led are more attractive from an LP’s perspective. Performance is starting to get proven out, just think it’s gonna take a looser fundraising market.
Most GP-led funds are trying to underwrite to 2x net to LPs, but to be conservative I would value your carry around 1.75x net, or if it is Manulife then I'd value it at 1.5x net lol.
For the cash comp, what is the split between base and year end bonus? Is the 400k DAW your total bullet payment expected for the carry assuming a 1.8x gross? If so, the carry is low.
Thank you. Regarding 2x - isint that the net return that traditional LBO returns underwrite to? Why would someone invest in traditional LBO fund when they can invest in a secondaries fund and get 2x with less risk? Sorry - a newbie to the sector. Just googled, Manulife is a Canadian insurance company while we are a traditional GP
Its all base, no bonus so lot of certainty on the cash. Yes, the $400k DAW is the total bullet payment expected for the carry over the fund's life if we hit a 1.8x gross. What would be the carry DAW (or bps) you'd expect for an Associate 1 and Associate 2?
Manulife has a GP-led secondaries fund that is notoriously crap.
GP-led deals in the buyout space underwrite to on the LOW END 2x and 20%+ net IRR...
Why would anyone invest in a buyout fund? Good question, but without primaries there wouldn't be secondaries.
I don’t think your math checks out to 100bps of the carry pool
Its $500mm fund with 1.8x so and 10% carry so its $40mm of carry and I get 1% of that
400k pay out over 8-10 years isn't very good. I'd pretty much get the carry out of your head since there is a vesting period.
It's 200k base? That's good. What's the bonus?
Based
To clarify, your cash comp is all base, no bonus? The only bonus is in the form of carry?
If so, $400k over the life of the fund does not seem like much at all. Especially when you’re not receiving cash bonus. I think it’s fine to not receive a cash bonus given a first-time fund. But you should think of it similar to a startup… if they can’t pay high cash comp, you should expect meaningful equity / carry
Yes. They essentially don't want to deal with year end bonus numbers so decided to give the all-in-compensation as base
I could negotiate - what's the carry you'd think is appropriate to ask here? For reference, $500mm first time fund, 100bps of carry allocation which amounts to $400k assuming a 1.8x gross
What is the vest schedule on the carry allocation? Given its an associate allocation could see it being closer to 2-3 years vs. 5 years which is more standard.
I'd probably haircut the carry by 50% given the time it will take you to receive (though I'd expect it to partially come back sooner than an 8-year bullet) and then divide by vesting schedule to get to an annualized compensation number. If you are in the $250k or so plus range, doing that math its not the worst offer given you aren't in NY and its a first time fund but could be higher going to a larger shop.
Appreciate this. The carry vesting is on a 3-year period
I did the calculation you mentioned and its $400 * 50% = $200k / 3 = $66k/ year so it comes out to $266k a year in annualized comp
I'm totally new to secondaries so I'm not sure if that's the right comp. I could negotiate but unsure what the appropriate ask even is
Seems fine given you aren't in New York and fund size. Given you don't have much experience with secondaries, I assume you are recruiting for normal-way private equity LBOs as well so would make sure this is what you want to do as well.
The other question is how far raised is the fund or is the target $500m? If it hasn't started raising or has a pretty light first close, there is a question of what the ultimate value of your carry will be.
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