Carry Expectations

For both development and REPE, what is a realistic amount of carry at each seniority level? At what level of experience and age should you demand or expect carry in a role and how large a percent of your comp should it be?  Is this usually negotiated after receiving the job offer or after working at a company for an amount of time? 

Comments (22)

Aug 10, 2022 - 9:04am
DevMonkey, what's your opinion? Comment below:
pudding

There is no standard. It will vary by firm. Some smaller firms would rather pay cash  and keep carry for the founders. Some larger firms will start paying carry when you hit VP. It all depends. 

Got it thank you.  From a personal finance perspective when should you leave all cash firm employment? It just seems unlikely the cash would compensate enough. 

Aug 10, 2022 - 9:11am
pudding, what's your opinion? Comment below:

That is a very individualized question. I don't know your situation so can't tell you how much cash you need and what risk you're willing to take to put it in long term compensation. 
In my humble opinion, cash is king. I don't care if I can make an extra $500K over 5 years if it's deferred. Cash now is worth more to me than cash later. Deferred compensation means (1) I need to vest it, which means I need to stay somewhere and (2) means the deals actually need to perform. 
Carry can grow like stocks if the deal outperforms. But don't kid yourself. It's not like a stock that carry grows every year. Generally firms will say something along the lines of : you make $300K cash comp and we will target $150K per year in carry over 5 years. So you'll get xx% of carry worth $750K. It'll vest 20% per year and you'll collect it when the firm collects it. If you leave before you fully vest, you don't get the unvested amount. Also-if the carry is worth less than what we are telling you - too bad. You suffer when we suffer. If it's worth more - great. Also-we have the right to buy all your carry back if you leave at 10 cents on the dollar. If we do this, you can't say no. Welcome to golden handcuffs. 

Aug 10, 2022 - 6:21pm
patrick_bateman_, what's your opinion? Comment below:

My opinion of carry these days is that it is primarily a way for a firm to handcuff top talent by giving you the opportunity to make above market comp in the long term (3-7 years). What it really ends up being in reality most of the time is a way for cash strapped business to retain high quality talent without paying out of operating cash flow (management fee's). This is why you see a lot of tech companies pay out RSU's, with the "startup" companies paying less salary but higher total comp with extremely large stock grants, than more established players like Microsoft (who up until recently had flat stock growth) pay more salary and less equity.  

As pudding mentioned cash is king - but carry is nice if you're willing to risk short term pay out for a long-term gain; you just have to keep in mind the NPV of what is being offered - cash today vs. tomorrow. All things considered a good carry deal would be getting paid an at or above market salary plus a carry package that puts you well above your market worth. Anything less than this ends up being a bad deal for the employee. 

  • Investment Manager in HF - Other
Aug 10, 2022 - 9:19pm

That may be true at the junior levels (even then I don't really agree with your take), but at senior levels you WANT carry. If you believe in the business model, you want big payouts for great performance. Additionally, at the top comp levels, the only way to pay that much is through carry. 

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Aug 10, 2022 - 11:13pm
Yakehito, what's your opinion? Comment below:

Cash is king. Your carry will vest over 5+ years. Worst I know is 10 years, so good luck. And if you leave, a lot of time the firm can elect to claw back up to +20% of whatever you've vested, so you can only hold onto 80% of what you were promised. Some even have provisions to claw back a portion of carry if you die, so yeah.

At the end of the day, your funds need to perform and you need to be there to get paid. By the time your carry is meaningful, ie you're getting carry awards as an MD worth 5m+ you need to be a lifer to get paid out.

Think about BX, crush it on Hilton acquisition post-GFC, you need to be there 7 (?) years later once monetized to get paid, and that assumes you were there long enough beforehand to get real economics. Hey, great if that worked out and you were there before and after to get paid, but you're not showing up at 28, getting an allocation, and getting paid out by early 30s after having left.

It's definitely a golden cuffs things. Hopefully you love where you work, who you work with, and what your firms strategy is. Otherwise, better off doing some $20m deals on your own, un-crossed, owning all the economics.

Cheers.

Aug 10, 2022 - 11:07pm
Yakehito, what's your opinion? Comment below:

Most of the VP-level (eg, 28-32 yo professionals) are getting ~$0.5-2m worth of carry, but it depends on how your firm's LPA works. Some net out travel expenses, DD costs, taxes, etc. Mine does not, so if you're actually netting a fund-level (eg, average deal-level net of promote) IRR of 18%, then net if those expenses (audit etc) and taxes, you're at a 15-16% IRR. Do you have a hard or soft hurdle? If former than you can get to the 20% of profits, if not maybe like 15% of profits, and so what you thought was $2m of carry is really like $1.5m, now probability weight that against chances of recessions, paradigm shifts (eg, retail getting hammered, office becoming irrelevant, etc), and you're maybe half of that, then consider you won't get paid for 7-10 years (if American waterfall, meaning don't get paid until the whole fund performs, vs "European waterfall" when you're paid by deal), and even more haircut, and maybe it's worth a third of what you thought you'd make, probability weighted.

Aug 11, 2022 - 1:12pm
Ricky_GiveEmTheHeater, what's your opinion? Comment below:

All good points.  Just wanted to note that your American and European definitions are switched. American is deal-by-deal, European is return of LP capital + pref before any carry paid out. 

Aug 10, 2022 - 11:17pm
Yakehito, what's your opinion? Comment below:

At the end of the day, all the ppl you know who are rich af from being in private equity and getting carry weren't probably getting carry awards that paid out and changed their life, they were founders and enjoying the economics that come along with owning the majority of the pints / economics. That's how you get chipped. Risk.

Aug 11, 2022 - 3:34pm
Ozymandia, what's your opinion? Comment below:
Yakehito

At the end of the day, all the ppl you know who are rich af from being in private equity and getting carry weren't probably getting carry awards that paid out and changed their life, they were founders and enjoying the economics that come along with owning the majority of the pints / economics. That's how you get chipped. Risk.

You are aware that the only difference between the founder and the person receiving carry is the amount each one has, right?  Carry = points/economics, as you put it.  It's tough for me to understand why you differentiate between them unless you're not understand what the terms mean.

Frankly, you can make an argument that assigned carry is better than being in the founders shoes, on a point by point basis, because it comes with less risk.

Aug 11, 2022 - 9:24pm
CRESF, what's your opinion? Comment below:

Agreed, the whole point of a fund is diversification. But at my old firm I did see two deals, done by one person, really hamper a fund. 2012 vintage fund, so the average deal should've been returning a 2x fairly easily. We had a bad acquisitions person who got excited by big, complicated deals. Unfortunately our CEO shared his horniness for big, complicated deals. Well we do two big, complicated deals by this acq guy - both that ran into big cost overruns that we (out of character) agreed to fund our pro rata share of. Both deal checks ballooned to twice their original size when it was all said and done. Combined they ended up being about 30% of the fund. We were able to get out of both of them for a 1.0x multiple after a lot of work, time and stress. The crazy thing is, that fund still ended up being a 20% gross IRR. But if you swap out those two deals for just an average 2012 vintage deal, oh man. Literally $10's of millions of dollars of promote wiped off the face of the earth. 

  • 5
  • Associate 2 in RE - Comm
Aug 11, 2022 - 1:33pm

The sentiment on this thread feels relatively jaded towards carry and the varying outcomes/experiences people have had. While I understand how carry can be golden handcuffs and over emphasized at certain shops, it can also lead to a substantial net worth as a w-2 employee.

To the younger folks here, I have many personal friends who are ~28-35 that have received substantial carry payouts that changed their personal situations. One instance being an acquisitions director (33 yrs old) that absolutely crushed it for their last fund and had a 5% carry grant. His payout ending up being around $8m. Sure many variables are at play with fund performance, carry structure, timing of when he joined/fund raised, etc, but I would like to see folks offer up some perspective to the upside of our business if you're a great performer with good timing at a shop that takes care of its employees.

Aug 11, 2022 - 1:48pm
Yakehito, what's your opinion? Comment below:

Wow that's amazing. That's a lot of carry to be awarded at that point in your career and they must have done a lot of multi and industrial. Good for him.

My point is most places are not as generous, are quick to rip your face off if you leave, invest in asset classes that take longer to monetize a fund (if he was in development they would have sold everything 2-3 years after they started, so you get paid more quickly), and there is a lot of hardship towards getting everything to come together, but you make a great point which is if you work for a generous group, that monetizes big returns quickly, and is in a winning category or geography, then you can get really rich.

Every industrial only group (think LBA) probably returned 40% fund level IRRs and hit it out of the ball park.

  • Developer in RE - Comm
Aug 11, 2022 - 8:31pm

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