Hey Everyone, VP1/2 (+8 YOE IB/PE) - not as the title suggests. I’m in need of a bit of advice about how, if at all, to potentially negotiate carry compensation in an upcoming fund. For background, I joined my current fund as one of the earlier employees and generally the only IP outside of the PM. I received fairly outsized carry percentage in the initial fund I joined ($1-2M DAW) due to niche/unproven strategy. Comp has been above median, so no complaints there. We are currently fundraising for a successive fund and have since grown our team across both operating and investment professionals, although none at the senior level. We do not have any other mid-level IPs, and I’ve become structurally engrained in all aspects of the team and future growth plans. As such, it was indicated that despite the new fund size growing +40-50%, DAW increased only ~15% due to a reduced carry percentage. At this amount, it’s a bit below market carry for YOE based on some of the online resources and forums here. Is it worth bringing this up to try and increase, or at least maintain, carry percentage? Or let it go and know that it will all work out in the end?
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Based on the most helpful WSO content, here are some key points to consider when negotiating carry compensation in your situation:
Current Market Standards:
Fund Size and Growth:
Importance of Carry Dollars at Work:
Comparison with Market Rates:
Timing and Fundraising Context:
Potential Risks and Rewards:
Strategic Approach:
In summary, it seems reasonable to bring up the topic of increasing or maintaining your carry percentage, especially given the growth of the fund and your significant role. Use market comparisons and your contributions as leverage in the negotiation.
Sources: Carried interest for Associates / Senior Associates?, Vice President Fund Carry/Equity, Confused about carry at PE Fund, How do carry dollars at work translate into annual compensation?, Q&A: European PE professional at a Large-cap Megafund
Bump
Sounds like you are established enough to at least make the ask. If you’re tactful about it and don’t act like a petulant child then you shouldn’t damage your reputation regardless of the outcome. At least find out if there is a set-aside for promotion to ensure you’re not stuck at the current level for the entire life of the fund and that you’ll get a bump when you make Principal.
Any suggestions on how best to articulate or pose the conversation?
There are public comps such as Heidrick & Struggles as well as those privately received by HHs.
What is your approximate fund size? It sounds like a smaller fund given the number of professionals and that you’re just out there raising fund 2. For a LMM fund, a fresh VP can expect about $1.5m of carry, perhaps up to $2.0m depending on the generosity of the Partners. In general, “years of experience” doesn’t play nearly as big a factor as title and role do, especially if your 8 YOE included more than 2 years of banking.
Note that it is unrealistic to expect your percentage to stay the same as the fund size grows. More headcount means everyone’s percentage is going down, so the focus should be exclusively on the dollars at work.
Your best argument is that you’ve taken substantial career risk by joining such an early stage firm and should be rewarded for this greater risk with an above market compensation package. It sounds like that was the case with fund 1 but you can argue that it should still continue through at least fund 2. Alternatively, if they aren’t willing to pay, they should offer career acceleration as a non-cash form of compensation for the increased risk versus going to an established fund. Furthermore, presumably you’ve been promoted since the first fund was raised and therefore a mere 15% increase in DAW compared to a smaller fund + lesser title feels quite small (if my assumptions here are correct).
If they don’t bite, you should try to pre-negotiate an increase in carry alongside your promotion to Principal, which is definitely going to occur during this fund.
Goodluck
Thanks for your reply. The upcoming fund will likely end up around $600M-$700M bringing total AUM to over $1B across various funds. We’re a small shop so really not any other IPs at my level ftiw. Do you think the DAW growth should be commensurate with the growth of the fund size? What is best form to introduce external market comp documents?
He says the % allocation goes down, so like-for-like titles that means no per definition.
I agree with most of what compbanker said except for using the argument that he took career risk by joining a new fund. That leverage only exits upon joining. Now that he is at the fund, that is like asking to be paid for past performance.
In comp negotiations, what matters is leverage. Are you positively contributing to the fund such that the partners do not want to risk losing you. Your only leverage is the implicit threat of leaving. To state the obvious, do not openly threaten to leave.
Tactically speaking, try to collect market data (which is what you are doing) and compare your DAW to the median. If you are below, explain to the partners that you believe you are being underpaid relative to market. If you are at the median, make an argument for why you deserve more. In your case, the crux of that argument would be I own more responsibilities than my peers because we are a small / start-up shop. If you are positively contributing, the partners may be sympathetic to your argument. Or not. And then it is up to you to decide whether you are willing to walk.
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