How to Value Carry?
Good Morning All,I recently received a job offer which is significantly higher than my current job. My current employer is likely to offer me carry as an incentive to stay. In order to evaluate the offer, I'd like to get a proper value of the carry.We operate on a fund model in which the average life is 8-10 years and we shoot for a 18-19% net return. My carry would be at the fund level. I have extrapolated the CF's, added sensitivities based on the planned exit pricing etc.My main question is what discount rate to use. Due to the extremely volatile nature of carry, I'm tempted to use something in the ball park of 15-20%. Curious what has been used in the past.Thanks!
I'd say just be conservative on the carry estimate and compare that with the extra cash you would receive in the next 8-10 years via the new gig and if you invested in the stock market (8-10%) with that cash.
So final comparison would be after tax dollars on the carry in year 10 vs after tax dollars if you invested all the extra income from the new gig for the next 10 years.
Will your carry be tied to continued employment? E.g. does it vest or anything?
Tough to value something as qualitative as opportunity cost, but if your carry is worth $1mm but you have to forego all other job offers for the next 5 years, you might pass up a way better opportunity for the sake of holding on. Also, goes without saying... a big recession could wipe out the value of the entire fund, let alone your small piece.
Carry is overrated unless you're 100% confident you'll stay at the firm for a very long time. I personally wouldn't get too lured in by it unless I was already mid/late career with a house + kids in school and absolutely loved the firm so I felt like I'd realistically be there for a while. If you're young I don't see the point in getting handcuffed when random life shit can still happen and you can get higher cash comp from jumping around while you can.
You can ballpark what your carry will be fairly easily if you just estimate the total fund returns and promote structure, equity invested, and your % of the total promote, and then also discount it over an 8-10 year period to figure out what it would equal vs. just getting additional cash compensation every year.
I suggest you avoid valuing it and instead think of it as a windfall if and when it comes to fruition. Just my two cents.
That works if you don't have another job offer with a higher salary sitting in front of you. He's trying to make a choice between more cash vs. some amount of carry that his company is going to offer.
I'm just saying that carry is somewhat uncertain and I personally discount that heavily.
I’ve always said if 1% of the carry pool, for examples purposes, is $400,000. If I am awarded .25% of the pool, $100,000, which I’ll receive in 7-10 years. I’ll call it 60% if that. So $60K. That’s just me but there’s no rhyme or reason.
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