Carry Compensation - How Much to Expect, Vesting, etc.
How do you typically see carry offered as compensation? What level does this start to factor into compensation packages? Are you receiving a percentage of the total GP profit on a project or fund basis, or only a percentage of the promote? Does this differ between a dev. shop vs. REPE fund?
I am looking at a Project Manager offer that includes 1% of GP promote per assigned project and am confused as to why it isn't GP profit overall. Thanks.
Because "profit" can also include fees. And since the theory is that fees pay overhead and promotes are the reward for a job done well, it doesn't make sense for the principals of your fund to give you a cut of the dollars which are earmarked for paying your salary in the first place. Perhaps the best way to think about it is that by drawing a salary, you are getting a piece of fees, and thus of the total profit to the firm.
Outside of fees, would you expect it to include a share of the preferred return on equity, or just the promoted returns on the subsequent tiers of the waterfall?
E.g., say there's a pari-passu return of 9%, and then the GP starts getting outsized returns at 14, 18, and 20%. Would you expect "one-percent of promoted interest" to include a share of that initial 9%, or only whatever is above the pref?
I ask because it seems like current market conditions (inflation/cost escalation, supply chain schedule impacts, cap rate expansion, etc.) are eating into GP promote. I'm just not sure what is industry standard. Thanks in advance for the insight.
It sort of depends (least helpful answer ever, I know). For example, if your principals are putting up a lot of the money, guarantees, etc (e.g. at a development shop), then no, I wouldn't expect to participate in the return on equity. I think that is compensating them for their risk and for tying up their equity. At some point, they're here to make money too! If you work at a GP fund and there isn't any owner equity in these deals, maybe that is a different story. If you work at a PE shop then you definitely should get a piece of everything above par, since that's the whole business.
As always, it depends on who is taking the risk on these deals. If the people running the shop are passing all that on to partners, I don't think (ethically) they have as much of a claim to be restrictive in how they're calculating a promote interest. If they're on the hook for hundreds of millions of contingent liabilities at any time, and are being required to put up the capital on which your pay is being promoted on, then that's a different story entirely
Curious to hear what everyone's vesting and clawback language looks like.
1 yr. on projects starting after hire. Nothing on currently under-construction projects.
Generally it's just promote - fee sharing is typically reserved only for senior partners/MDs and only on deals they personally source (and not all shops will offer this).
Fees are intended to pay overhead, its not a performance bonus to your company. Your salary is your sharing of the fees.
At project manager level 1% is pretty typical I would say.
I would argue deal size / company size is a consideration here.
If you do $200m+ high rises vs. $65M garden apartments, that % number should scale up rather significantly. Additionally, if you work for a large, merchant builder, I would expect less promote vs. a smaller entrepreneurial developer because of less mouths to feed, additional risk being at a smaller shop, etc.
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