This might be a stupid question. We hear about carry up and down this site and being the actual path to wealth. How is it actually paid out though, and when? Do you just get a big ass check randomly 7 years after the fund life? Any insight or commentary would be amazing
| +52 | Leave brokerage to be GP | 12 | 2d | |
| +49 | New Comp Database - Google Form (Now with Data Validation) | 24 | 2d | |
| +24 | Seeking Career Guidance in Real Estate Development Post-Graduation | 3 | 3d | |
| +23 | Going out on your own | 4 | 2d | |
| +23 | Spreads over SOFR/UST | 8 | 5h | |
| +22 | REPE/Development GPA | 15 | 5d | |
| +22 | Real Estate = complicated + underpaid | 15 | 2d | |
| +20 | High achiever that doesn’t want to work weekends | 12 | 13h | |
| +17 | Fisher Brothers | 6 | 2d | |
| +15 | Can you exit from Fund to Asset management or Investment in Real Estate ? | 22 | 20h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Good question.
.
Zero amounts of detail here. You could’ve kept this one to yourself honestly
Carry for a commingled fund is usually paid out during the “harvest” period of the fund (fund life = investment period (3-4 years) + harvest period (3-4+ years)) when assets/investments are sold/realized. A fund is usually only eligible to pay out carry once you hit a return of all initial capital plus a preferred return, so you have to realized enough investments to hit those two hurdles before you can get a check. So if you join at the start of a 8 year real estate fund, it’s going to be 6-8 years before you start seeing large checks arrive.
There are a lot of nuances to this depending on the fund structure (waterfall, closed-end vs perpetual, etc) and for credit funds I have seen them pay out small carry checks from cash flow regularly earlier in the fund life. Also you might get small carry checks every year for “tax advances” that you might owe.
Basing this on closed-end funds - generally speaking you will get paid your share of any promote paid out from operating cash flow as it is distributed (if applicable - i.e. fund has structured the pref so that operating cash flows do not need to repay initial capital before paying a promote so long as the cash-on-cash hurdle is surpassed), and the larger piece of your share at harvest vests over a contractual time period (usually 20-25%/year or similar). If you leave before the exit event, whatever has vested will be paid out to you down the line when the fund wraps up but you lose the % that hasn't.
After a capital event, you get a truckload of turnips delivered to your door as payment-in-kind for whatever the amount you made was supposed to be
Depends on how the investments are structured. If the carry is paid out of a fund then it is at the fund wind down period. If it is asset by asset it is done at liquidity events. This isn't an easy question to answer honestly because it depends on how the firm does it. Some firms run funds but let their people invest on a deal by deal basis due to the fact that the fund lifecycle is usually longer than the employment lifecycle. Others force investments into the fund mostly because it is a cheap loan to the company due to the fact that it isn't common for someone to stay at a firm for more than 10 years unless they are bought into the firm at which point their carry comp is baked in from the get go.
Serious question- what if they force investment but someone doesn’t have a large chunk of change to put into their firm’s fund? Forgivable loan?
At a lot of companies, including mine, yes.
Oddly enough, the laughable 10% interest rate they were offering a few years back doesn't look too bad now ;)
I'm in two closed-end funds nearing harvest periods now and will give some insights on how it's going so far... my jarring introduction to the dreaded K-1.
Throughout the life of these funds, I've received a minimal amount of actual cash distributions, probably $7-10k over four years, wouldn't even cover my invested capital.
However... now that the promote is on the horizon the K-1s for tax returns start to treat it as capital gains. I had to pay $30k & $45k in capital gains taxes the last 2 years for promote that is *likely* to materialize, yet I haven't actually pocketed a dollar of that and it's not guaranteed income. My tax attorney's answer as to what happens if the fund fails and I never see an actual dollar of promote - you only get to use the excess capital gains tax you paid to offset other capital gains from the year the loss occurs. Sure... I'll just check under the couch cushions for a $100k capital gain to have on hand in case things go south.
Don't get me wrong it's great to have potential promotes coming my way to require those taxes, but the way this works makes absolutely zero sense.
So yeah, Phase 1 of how carry is paid out is that (maddeningly) you pay taxes first. I'll give you an update when I reach Phase 2.
I know promote pay-outs don't go hand-in-hand with K-1 activities, but you went 2 tax return cycles (& likely 2.5+ years in real time) paying 1231 gains without receiving any actual promote distributions? Does your shop get imputed promotes paid out before all capital and pref are paid back with some sort of clawback provision? Even with money flow timing issues, they seem to be pretty big numbers unless all the money is just sitting in the manager entity's bank account. I feel it's pretty standard to get a smaller chunked distribution to at least cover some/most of your tax burden (ie 15%-20% the following year to cover the long term cap gain taxes), and as far as I'm aware, carried interest is still taxed as long term cap gains (for now).
Correct, your GAAP taxable basis is your ending Capital Account balance not what's actually been paid out. And it's not cash on the balance sheets either.
This is an institutional fund, all pension fund capital so the remaining portfolio asset valuations while conservative are reasonably accurate. The first 75% of the portfolio that's been sold averaged IRRs of probably 25% over 3-4 year holds, so even when you discount the remaining asset values for tax valuation purposes the capital balance math starts recognizing your incoming promote. Otherwise you could be underpaying capital gains taxes and would need to pay penalties once the fund actually wraps up. It's an ultimately nonsensical way to calc taxable basis for the GP. Funds typically will set aside up to a certain dollar amount to distribute to the GPs to pay these tax hits and ultimately net it out once the final promote shares are calculated.
I have actual ownership interest in the GP and committed capital so yes it's all long term capital gains. But I'm pretty sure that if the shop is just paying you a portion promote and you don't own the share outright it would be taxed as ordinary income.
Ut consequatur ipsam dolor quis laudantium. Qui et beatae dolor quidem quod sint tempora. Cum quia vitae labore.
Soluta repellendus omnis at saepe. Et aut aliquid non molestias.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...