Carry: 1% - 2% ..or $50k - $100k?
I always see people in the compensation threads say “1% carry $50k-$100k per year”… How is this $50k-$100k being calculated?
-
(a) What does the 1% exactly mean?
Like 1% of the sponsors Equity? -
(b) What exactly does the $50k -$100k mean? Like Equity given in each deal or payout that year from the total distributions / carried interest?
I.e.
(a)
$100M deal
1% of the 10% Sponsor equity ($10M)
So they get $100k in equity that year across all deals closed or the fund?
…Do they also get the (let’s say 8%) distributions of $8,000/yr (on $100k)
(b)
…Or… is it like $50k - $100k paid to employee from the total 8% distribution on sponsor equity. So that would be $800k/yr to sponsor & $50k-$100k of the total $800k/yr would go to that employee?
What if they leave firm? Do they still keep the equity?
I work at a new small/med shop doing AM & Acq. I want to try and get this in my comp package… I’ve asked other friends in junior positions and no one can give me a solid answer.
Any insight would be very helpful.
Same situation, negotiating my package at a fund and keen to understand how it would impact my comp.
Find it very hard to believe anyone is giving up 10% of their ownership position to a VP level person....
Let's say a firm has 3-4 Partners that would mean each partner is barely getting more than VP? Doesn't make much sense to me,
I've seen it with small Sponsor's where the VP is getting 10% only on the deals they're running on, and the deals they're doing make up like half of the companies deals because it's so small. Meaning there's 1, maybe 2 VP's + the founders and that's it.
What does he get in the deals he’s just helping with?
Also so in your example would this mean the VP has “1% carry on sourced & executed deals”?
(Which shakes out to $100k on a $100M deal with 10% sponsor equity?)
Agreed, not sure how this is calculated or what it all means tbh…
Playing devils advocate… if it’s a small shop and there’s 2 partners and 2 VPs. Maybe that’s where the major portion of their comp comes from?
Or…If there were 4 partners & 3 VP or something,.. you would expect for larger volume of deals so it would have a larger pie for everyone?
Once again not sure… just trying to understand mechanics
Worth remembering that plenty of firms have only 1-2 partners and a "VP" can be someone with 5 years experience or 15. Titles don't matter in this industry at all.
Fair enough!
And a lot of firms that small are raising private capital on a deal by deal basis so they can't pay big salaries and thus give large pieces of promote on the deals instead. I've seen this work out beautifully before and also be a nightmare. On the up side, I know someone that did this as an associate and grew to VP, got a big 10% piece and he was running all of their multifamily deals in one of the hottest sunbelt markets. They bought like 6 deals there between 2017 - 2020 of which he got 10% of each, and sold them all in 2021-22 near the peak. I don't know exactly what he made, but know some of these deals hit a 2x UNLEVERED (one of them they hit almost a 2x unlevered in 18 months, insane), so I'm pretty confident saying he made at least $1M if not $2M - $4M based on his 10% and was around 29 years old when those all paid out. Tough part is that he makes a low salary and measly bonus and now they haven't bought a new deal in 2 years so he hasn't made any money the past couple years, but I don't feel bad for him and I'm sure they will start getting active again this year. On the other side, I also know some people that did this but their firm wasn't very successful. They either couldn't raise the capital for the deals they wanted to buy, were in a sector that got nailed like office, or just didn't exit when the market was hot. Big fat $0 on those promote checks and they made like 50% of the salary/bonus over the last 5 years that they would've made at a bigger company. And back in 2021, some of those guys were looking at their models with peak exit projections and drooling over the promote they were gonna get. Their firm dragged their feet in exiting, and in 18 months their dreams were crushed.
Generally the $50-100k is just an estimate of what their 1% carry is worth. The 1% generally speaking is reflective of 1% of the promote earned on the deal.
So that would mean they expect their firm to make $10M in promote each year (for $100k)?
…So this would be from the cash flow split I assume (not the sale proceed split)? Since typically small/medium firms aren’t exiting every year?
…. What happens when they sell the property? The VP will be looking at a much bigger pie for the 1% promote?
(Like 1% of $50M? So that year he would make $500k)
They are averaging the expected payout to get the annual number. Say you estimate your total carry is worth 500k over a 5 year lifecycle. Could get nothing for 4 years and 500k in the last year but that would average 100k a year. There's never going to be a consistent annual payout.
As other poster said - it's generally the average of the total expected payout they're quoting, timing is not consistent.
Look, what this ultimately comes down to is three things - how your shop structures their carry program, how they raise capital (SPVs or funds), and how they structure their waterfalls. Generally speaking, you would get paid carry as it is earned by your company. If you have an IRR-driven waterfall and/or a european waterfall in the case of a fund, you're probably not getting anything until the deal is exited/the fund gets rolled up. If its an american waterfall fund or an SPV that differentiates between operating/capital distributions, you can start seeing promote payments much earlier.
There's no one size fits all rule here. You have to understand the specific structure you're getting yourself into.
Related question:
How does carry work at an LP? It’s my understanding that carry is typically calculated for a GP as a percent of promote, so I am unsure how it works at an LP assuming that is still common for high level management
They have their own waterfall with their investors. So the cash flow of the deal first goes through the GP / LP waterfall to get the LP cash flow. Then that LP cash flow goes through the LP / Fund or Investor waterfall. You'll see more of the 20% promote over an 8% / 9% return simple waterfalls with LP's and their fund or investors.
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