Carry
Has anyone on this forum hit it big? I feel like carry is just a fantasy at this point in the cycle...
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Based on the most helpful WSO content, carry can indeed feel elusive, especially during certain points in the cycle. Many professionals on the forum have shared that hitting it big with carry often depends on timing, firm performance, and the structure of the fund. While some have achieved significant payouts, others highlight the challenges, such as long vesting periods, fund underperformance, or economic downturns impacting returns.
If you're feeling disillusioned, you're not alone—many in the industry express similar sentiments during tougher cycles. However, those who have "hit it big" often emphasize patience, aligning with the right firm, and contributing meaningfully to fund success as key factors.
Sources: Carry in REPE, No country for old I-bankers (starting a mid-career thread for finance professionals), Actually Realizing Carry, Is PE worth it? Can someone explain how carry works (BPS, etc)
I’ve been paid out pretty handsomely on my carry, but I’m in debt so the numbers start smaller.
Those are two separate points. I’ve done well. Am I doing well now? Lol no.
I was about three years too late. The guys (formerly) at my shop who got carry on the 2017-19 starts are de facto retired now. Meanwhile, I'm goose egged on literally every deal we've done since.
I'm sorry about that - hearing a lot of newly minted senior guys get crushed during their first go around
Have a decent slug coming up on a few deals this year. These were single deal waterfalls, no funds.
The tax advantage of carry and the immediacy (when compared to saving all the money over decades), is very attractive.
In California, where I’m at, long term capital gains for Federal tops out around 22%. For state income taxes, tops out around 13%. Total around 35%, with your effective tax rate somewhat lower because taxes are progressive.
Compare 35% to if you made the same amount but as ordinary income (Federal would be around 15% - 20% more).
So basically, 20% tax savings comparatively. That means for every 5 years of working and saving, you get an extra year of savings stacked on top of it.
Now, the compounding aspect. Getting the money sooner is always better. When you can get a payday that totals your entire career of saving W2 wages in one year (Year 0 being today); that is significant from a time value of money perspective.
So, that’s the good side.
There’s also the problem of actualization (not taught in school!). I don’t know about big institutional companies, but on the smaller partnerships scale, people can get screwed on the promote despite what the operating agreement says. So, not only you’re hoping for the right timing but also the right partners. The way people act towards each other when they perceive this is their one and only big payday, is an interesting study of human psychology.
That's why I say much of life lies in the grey area between the Law of the Jungle and the Rule of Law. This scarcity mindset sets in. I hope that doesn’t become any of you. There will always be another deal. The way you conduct yourself in pivotal moments is your true character. And, you end up fighting an unnecessary war.
Things can get complicated when your share represents a big amount.
Very true and not discussed often enough in these pages. I think there's a few dynamics:
However, on the time value of money aspect, isn't that an argument for taxable income/salary over carry? Over life of 7 year fund, rather than get taxable income annually for seven years, you're getting the capital gain in year 7? I agree you're usually coming out ahead but trying to understand this point.
Really good points to add, thank you.
When I was giving my thoughts with the comment above, I was thinking a life changing liquidation event (“hit it big”), vs something like a deferred bonus over a 7 year fund life to supplement say “blah” compensation during that time. So, the Year 0 is today comment I made earlier of getting all your annual savings for the rest of your career today; meaning millions, (vs incrementally over say 30 years), works better obviously for time value of money.
When referring to good, but not really life changing carry (“the carry you stack” over your career; we’ll call it “stacking carry”), I think it is generally better to get paid more Years 1 - 7 than having to wait for the true up in Year 7 or 8.
Reminds me of a developer who got a $500K promote after Year 5, who said to me he would have rather gotten paid $100K each of the 5 years as a W2 worker at a company (which he did later work as a W2 as my co-worker).
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