Can someone explain carry in CRE
How does it work for portfolio or asset managers and how high is the upside with getting carry fees?
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Interested in hearing about this too.
Depends on the success of the fund.
Can you be more specific? It’ll depend on the fund, compensation structure, they provide, and what level you’re at. An analyst may have zero carry, but a VP may have carry worth 6 figures at a small fund and 7 figures at a big fund. Nominal dollars under management matter.
I guess just in general what it is? Is it like a small cut of a deal?
Got it. So you’re asking what is carry?
Carry is an extra portion of the profits. So if a fund is $100 in size and has a length of 1 year for investment purposes. The fund manager invests $5 and the Limited Partners invest $95. The Limited partners get a preferred return of 8%. The Carry (share of profits to the GP) is 20% above the 8% preferred return.
At the end of the year, the fund makes $200. So, instead of the profits being split up based on the investment percent (95%/5%), you need to take into account the preferred return and carry.
the LP is due 95*1.08=102.6 (this is the preferred return.
the GP is due 5*1.08 = 5.4
Each investor receives their initial capital plus the preferred return. The remaining capital to distribute equals 200-102.6-5.4=92.
Now that the preferred return is achieved, carry comes into play. The GP will keep 20% of the profits and the LP will keep 80%. The GP keeps 92*20% =18.4. The LP keeps 92*80%=73.6
overall, the GP invested $5 but received 5.4+18.4. This is a disproportionate share of the profits relative to their investment. This is carry.
The structure above can get much more complicated but in a nutshell; this is what it is at its most basic level.
So are the percentages and calculations a pretty typical scenario? That seems pretty high, which is good.
Hey, you sound well rounded on carry at the deal level. Would you mind explaining how it works when it comes to individual carry as part of the compensation? I know this is highly dependent of the firm and the role, but any basic explanation would be appreciated.
I might be wrong here, but I am not sure to understand how big bucks are made through carry, as I feel that a lot of REPE funds are doing at best 2x or 2.5x equity multiple on their investments?
So take what I gave above and than at the individual level, carry is awarded as a percent of the total pool. So if a deal is projected to have carry worth $10,000,000 and you are awarded 2% of the carry. If the deal hits the projected returns, you will receive $200,000. Now-how do you make tons of money with this-well if you can get a larger percent of the carry, or for instance, on a fund with let’s say $300,000,000 - the carry may be worth $35MM-$45MM. So if you can get let’s say 3% of that. and than there are 3 funds - you’re carry might be worth 3% of $40,000,000 multiplied by 3. So $3,600,000. Now just imagine what happens if your firm has a fund with $1 billion AUM-the carry pool may be worth $120,000,000. And if the firm has 3 funds going over time. That’s a $360,000,000 carry pool. If you can get a few points of that - it adds up really fast…
So you need to be a VP asset manager to get those kinds of numbers?
It really depends. Some tiny funds may even grant carry to analysts to entice them to join because they're taking a risk joining a smaller/newer fund. For larger, more established funds you'd have to be an associate or above probably but again it really depends on the firm.
No. The numbers I referenced were just random numbers for an example and have absolutely no grounding in reality. I do not know what a VP in asset management would make. But if I had to guess - $300k-$400k all in, including long term compensation (carry).
You have to invest your own money to actually get carry tho right?
No, not necessarily. While some firms may say you need to invest a little bit in order to get your carry, think: $1,000-$5,000, not all firms make you do this. And the $1,000 number could be even lower.
Why are you so worried about carry. With your laughable understanding of CRE, I’d say you’d be lucky if a good shop spit your way and let you work for them for free, let alone allow you to partake in the profits of a deal.
Very helpful, thank you. How do you believe carry is split at large funds such as Starwood or Bx for example? These guys are running $12b funds but the cake might be split as fuck between a lot of teams right?
While all firms are different, what % of the carry is awarded? Some people are getting 1% some 3%, and higher % to Partners and Managing Partners etc. etc. If you had to guess what % is not distributed and just going back to the firm for future investments, growth, overhead etc.?
OP... I think you are asking more generally about "Long Term Incentive Compensation" (aka, LTIP), more than "carried interest" (the full name of "carry" also know as "promote" or "promoted interest"). Generally, the actual "Carry" (i.e. promoted/carried interest) is owed by the firm and/or its partners. Most of the time, employees are not actual owners of the shares (or units of an LLC) of the carry/promote (i.e. the class of shares/units that earns the payouts the way pudding described). Instead, they have LTIP (often via an employment agreement, complete with vesting periods, terms and conditions, and maybe even claw back provisions) of which payout is based on the "carry" paid to the firm (whether firm wide or specified by individual deal/fund).
I would generally observe that discussions on WSO (and even common parlance in industry to be honest), uses they phrase "getting carry" to just mean LTIP (note, this is specifically compensation paid out over a period longer than a year... i.e. an offer can be Salary + Bonus + LTIP). If a firm is publicly traded, this LTIP could actually be paid as RSUs (Restricted Stock Units), that become liquid with time (contingent on sustained employment). Since many of the largest private equity firms are publicly traded (Blackstone, Brookfield, KKR, Carlyle, Apollo, etc.), this is pretty normal now (I've actually read the public filings of one of those describing how the "Global Carry Pool" is paid out in RSUs).
Some LTIP programs may allow or require you to co-invest, either with "borrowed" cash from the firm (or write a check), payroll deduction, or participation in a company's Employee Stock Purchase Plan (ESPP). In such cases, you are almost always (I'd hope always...) fully "vested" in the shares/units your money buys, but the "incentive" ones from the firm will vest over a period of years (maybe as long as 10 years, or until the deal is recapitalized, or fund liquidates, etc.). This can be all over the place and vary greatly firm to firm. It can also vary by level... meaning... associates/analyst may get nothing (maybe just an ESPP with some general discount or bonus share based on performance), managers/directors get some small incentive bonuses, and senior mngt getting large incentive bonuses, and exec/c-suite getting full/true equity and major payouts (FYI... these higher up ones may be "hidden" to junior people). In one case (it's Hines.. this is well known), senior mngt literally "borrows" the money from the Hines family for their interest in the deal (with massive, substantial upside), but they literally sign promissory notes and pay interest on the loan (and yes, if the deal explodes... they still owe the money!).
Lots of nuance and details here, but the general idea is this..... You get paid incentive monies when/how the firm makes money (like a big promote payout from a deal that sells successfully), you have to stick around to earn the right to collect, and maybe (in some circumstances) co-invest or buy shares to unlock the full potential of such programs.
if you co-invest as an employee, are you part of the 10% GP equity or are you an LP technically speaking?
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