Who makes more: manager of PE fund with carry but no ownership of the fund or someone who owns 1% of the PE fund's holding company but doesn't even work there? (Also by manager I mean partner/principal or whatever you consider the top employee role in a pe fund structure)
Edit: I know it depends on their dividend policy but let’s just say generally speaking
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Depends on AUM but for firms that are still early in their journey the Partner would because get paid a great base salary plus double digit carry allocation.
The 1% owner gets distributions of net income, which in most cases would be zero.
For older, much larger AUM funds who monetize their future stream of management fees and carry, the 1% could be material.
Usually it’s not an either / or type choice. For MM funds by joining the partner ranks you also become an equity owner (by buying in) of the management company.
Wait how come net income is often zero? Let’s just say a couple bn for AUM.
Also I’ve always wondered how do you value the 1% stake of the holding company. Like obviously the value of the fund isn’t the AUM and the firm doesn’t ‘own’ the assets as it’s all bought with leverage or investors money, so what is the actual value of the company behind all of it?
If it’s a couple of billion AUM then there will be positive net income.
Depends on the staffing level, but from I understand the first is often negative and the second fund is positive income but combined the first two funds are pretty neutral. Noting that first time funds are typically less than $500m.
The management fee once second fund is raised reduces because usually the fee rate drops and is based on the proportion of assets left (so a lot of exits actually reduces management fees but is positive for carry)
The other thing that influences it is the fee sharing ratio. Some funds have structure where all fees charged to portfolio companies (monitoring fees, deal fees, exit fees, etc.) are returned to LPs and therefore count towards the returns and ultimately carry. Other funds have a fee sharing arrangement where 20% or even 50% of all fees are retained by the management company. For these funds, if it is a particularly active year for transactions or there are substantial monitoring fees, the amount of fee income can increase substantially, leading to either bigger bonuses or … a bigger distribution to the owners of the management company!
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