Realizing carry
I was looking on Pitchbook at DPI metrics for many funds and seeing that there are many from 5-10 years ago hovering really close to 1.0x. Assuming these numbers are accurate, are the LPs getting their money back, and are senior investors realizing any carry? How is it that people swear by PE when so many funds are below 1.0x DPI? Maybe there's something I'm missing, so any context/information would be greatly appreciated!
There's a big difference if they're from 5 years ago versus 10. Think about the life cycle of a fund:
As you'll see, you wouldn't expect to get carry from a fund until easily year 6+ unless you (i) had some unusual early exits (e.g., 2-3 year bluebird hold) and (ii) GP, at their discretion, opted to begin paying carry before 1x and hurdle was achieved (which carries clawback risk).
All to say, people get paid, but it takes real time to get started. You also have to remember that fund "stacking" becomes a real flywheel, so if you take the timeline above, but stagger another fund behind it and after it, you'll start to have payouts all the time from various vintages (hence why MDs have much more frequent carry pay-outs than like a VP who is first getting this engine going).
Very helpful, thank you!
Yeah that's ultimately the goal... if you are 50 yo and have been w/ a firm for 4 or 5 funds where you've been allocated carry, there's probably 3 to 4 funds that 'should' be paying carry. In that scenario, the stacking dynamic could mean multiple millions per year and probably dwarfs your salary (which is probably pretty high if you're a sr partner).
Not really. The reality is you can only have about 3 active funds at any time before your LPs start complaining about your DPI and that they need to limit their exposure to you (maybe a 4th on its very tail end). Then subject to your waterfall, these funds are dry for ages and then pay a windfall typically through the catch up. So you’ll get paid about every 5-6 years realistically, maybe every 4-5 if you’re at a fund with strong DPI. The place to actually get paid regularly is the GP ManCo
Yes but this is also why you dont annualize your DAW based on a T+5 years schedule from being awarded let alone vesting. A more realistic case is perhaps 1.4-1.6x which implies annualized carry of $3-500k for principals and $1-1.5mm for partners at MM shops (2bn-6bn AUM). Math makes more sense as you get to$5bn+ AUM and the fund performs over 10+ years.
Even funds 10+ years ago haven’t paid out don’t listen to the first response: look at the pinned thread about nobody having made money. It takes like 15 years to pay out
What about funds that pay out on a deal by deal basis?
Still have to keep the carry in escrow if DPI is low to avoid the risk of clawbacks, so haven’t paid as well unless leadership is truly reckless and/or greedy
You will probably never realize carry lol
Safe to assume no significant carry paid out if any at all at 1x DPI
Another nuance is that in some funds carry is deal by deal so you could theoretically receive carry checks even if the overall fund DPI is 1x
American waterfall is extremely rare in funds raised the past 5+ years IMO. In my view part of the proliferation of independent sponsor firms is that the carry is deal by deal (and fundraising a fund is awful, while if you can find 3-4 FO who like you to invest in deals you're golden). There's a bit of a tide turning in realizing that raising a fund is a giant pain in the ass if you are truly a deal person that wants to crank deals and improve companies raising a fund may not be the smartest move. I even had a placement agent recently tell me he advises people looking to spinout from larger firms to go the IS route if they are confident they can land deal partners (which are growing like crazy) as running a fund firm vs. IS firm is much more difficult. IS firms can run hundreds of millions of dollars with 3 people while a fund doing that would need 5-6 at least.
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