Co-invest Opportunities
Just got my first opportunity to write a check for a deal I can invest in alongside the partners (LP returns after splits, don’t have any true carry yet). How much has coinvest help boost some of your guys’ comp for those who have this opportunity? I imagine it can snowball pretty nicely over the years. I’m at a value-add firm so even LP returns are usually spot on, but just want to get an idea of the potential value of co-invest from those who are more seasoned investors alongside their team. Is this a big advantage in the field, do you guys consider this as a type of carry on top of normal comp?
What stage are you in your career? How long do you expect to be at your current shop?
18 months out of undergrad, 36 months with my shop. Looking to be here for the foreseeable future as long as my comp is tracking with the market. Obviously any coinvest would be paid out regardless of whether I’m with the firm or not once that check is written.
Yes, coinvest will pay out either way. The reason I am asking is if to see if you are close to a carry stage. In some shops coinvest can sometimes set a precedent to delay carry. So if you plan on staying long term you might want to give this some consideration. Carry can be used at comp negotation time as a tool to keep you around.
If you plan to be at your firm for a while and the average hold is 3-4 years, this can be huge. You’ll have some early exits I imagine (hopefully) at 2 years as well and you can begin snowballing your capital. Good news is you can hopefully use this to grow your wealth. Bad news is it’s huge golden handcuffs. Either way, coinvesting will really help you grow wealth if the deals do well, and if you refi instead of sell and return capital tax free which you can re-invest - it begins to pile up. I worked for a short stint at a firm that allowed employees to co-invest and those that had been there for a while were basically all in on the firm as it was their wealth creation vehicle. They were able to invest sans fees and promote. So less return than GP but more than LP. And they were turning deals every 2-4 years. So had the opportunity to grow wealth significantly. Even if you invest a few thousand dollars to each deal, and you do 1.6x your money in 3 years, you reinvest the turn of capital and keep moving, over 7-10 years, you’ll have significant growth (if the deals perform).
It can definitely be huge - is your firm taking LP fees from your co-invest though (i.e. AM fee, deducting your pro rata share of audit expenses, etc.)?
While not sharing in the promote or fees is typical at junior levels, it's more common on co-investing for the firm to at least not take fees on your capital, which effectively lets you generate deal/project-level returns.
I know that most megafunds have something called side by side you can basically take a leveraged position in any of the drawdown funds. You basically become an LP (but yea the golden handcuffs still pertain). This is more of an aggregate play than relying on individual deals.
Yes if you invest 500k-1M equity, after leverage the returns become material to your compensation. Especially when you assume 1.8x MOIC + . Really depends what 300k of extra earnings average a year means to you if you are making 2M+ a year when it pays out as a partner. Very relative and specific question that cant be answered straight forward too many variables.
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