Been scrolling through reading about carry and coinvest differences between UMMs and MFs. Why do people favor the MFs if they could go to a UMM and get way more carry? Is this idea true? Just trying to learn. Any responses are appreciated.
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I don't think you get 'way more carry' in a UMM in terms of absolute dollar. It probably equals out to be the same (give or take). Also carry starts getting very firm dependent so its hard to say which is better and from my friends experience given how large some UMM firms have become the hours at MF/UMM are relatively the same
MF: 10bps as a VP in a $15bn fund and the fund returns 2.5x that's $3 billion to the fund that's $4-5m
UMM: 5bn fund and get 50bps that's also $4-5m to you
Thanks for the in depth response. Does carry usually start earlier at not MF funds?
but isn't that a little flawed because it implies that you need 5x the manpower to deploy a fund that's 3x the size when, in reality, human capital needed to deploy is far from linearly proportional to aum?
I wouldn't take the numbers too literally but at the end of the day what's important is the DAW and at the VP level at a UMM/MF you'll broadly be getting paid the same (+/-$500k-1 million...which sounds like a lot but there is a lot of variabilities to carry). I'm sure there are outliers here and there where carry can look substantially higher but haven't really seen any of my friends get outsized carry at these shops
At the associate level, it's better to get the MF branding / training then jump to a UMM later for the carry upside; 99% of the time you're not getting carry as an associate anyway
Thanks for the response. Is that a common practice? If so, at what level does that happen? VP? Principal?
Typically whatever the post-associate role is will be when you first get carry. Naming convention can differ by firm (senior associate, VP, principal, etc)
One thing I had in mind from my junior MF experience is that it’s really hard to get 2.0x+ on a $20bn+ fund. Like, super hard. On top of that, to raise that much money often means more concessions to LPs (hurdles, European vs American style carry).
For VP+, I think it’s worth considering a MM/UMM that has a track record of actually hitting 2.5x (some consistently are >3x) on their funds. It’s the starting point where you really start evolving as an investor.
Do you have any examples of MM/UMMs that are returning 2.5x or 3x consistently?
Are those returns on a yearly basis? If so that’s unbelievable.
Veritas, HIG, Serent, STP off the top
Thanks, also out of curiosity, if MM/UMM investments are capable of yielding better returns, why don't the MFs just move downmarket and do more MM/UMM deals rather than a couple of large buyouts?
To be fair, it is a bit of a different risk-reward. MFs only have limited resources to deploy much larger funds, so they will gravitate towards larger, "better" businesses and pay up for them (thus on average likely to have lower returns).
For the LPs, it also plays a part in their portfolio where they feel comfortable dropping large allocations into these MFs understanding that even a 1.5-2.0x return on that larger amount of money is pretty good and something they can hopefully count on.
As fund size gets really big, the fee income becomes very attractive, not just potential carry. So if MFs can raise another $20bn+ fund by doing a couple large buyouts of good businesses targeting a 1.5-2.0x return, then that's what they are incentivized to do. However, to my point before, I would consider that to be different from a pure "investor" mindset, where now you are taking into account fund economics a lot more versus just analyzing businesses.
Potential for smaller slice of a larger pie, higher cash comp and brand name.
I say from working in MM, but interesting to see the responses.
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