Excuse the naivety of the question, but I don't have personal experience with it. I've seen a few related articles, but most seem to be for corporate/business PE transactions.
Within real estate, how and when does one get paid out carry (assuming this is built into your comp structure)?
Private Equity: Is it by asset annual performance/returns, by fund, annually, when the asset is sold/exited?
On that same token, how does equity get distributed and paid out at a publicly traded REIT. Obviously the REIT structure makes this interesting as 90% of profits are distributed to shareholders. So, would one get "carry" in the assets? Or, is the equity piece tied more to stock options? If it's tied more to stock options, my guess is you would get paid out on portfolio performance as it relates to the stock, but again this is the question overall.
If it's more complicated than that, meaning each fund can structure it differently, if anyone has specific experience can you share it?
Will speak to the public REIT side since that's where my experience lies: I have only seen equity compensation in the form of stock (not carry related to individual deals). *There are instances where individuals contribute assets to the REIT and get some participation tied to those assets - but I'm speaking purely from an employee compensation perspective. Public REITs will disclose the structure of equity compensation for senior management in their filings - so you can get some more examples there. Often in the form of restricted stock or stock options that vest over time or if the firm hits various targets. For more junior employees (not in the c-suite) - vesting over time (vs. stock performance) seems to be more commonplace from my experience (makes sense since employees outside of senior mgmt aren't going to have as big of an impact on firm performance).
I can't speak for the REIT side of things, but in REPE (at least on the LP side) it really depends on how your fund is structured. For example, my firm manages a series of closed ended funds, all of which have a European Waterfall structure with our investors. Our fund's carry is IRR driven, so we did not really hit the carry until halfway through the fund's life (when we started selling assets). Once that happens, employees receive quarterly distributions based on their carry %.
Some firms manage funds with an American Waterfall structure, in which you receive carry on a deal-by-deal basis, but are typically subject to clawbacks should a deal underperform.
When I worked on the GP side, we did not manage a fund but would instead syndicate per deal. I received a % of carry for each deal. Since each deal was a separate syndication, I was not subject to clawbacks.
VERY rare if you have a common LP for each deal. What is more common is a developer / GP will raise a "Co-GP" fund, where the GP is the same on each deal (as is the GP equity coming from that deal) but has a unique LP investor.
Ig. GP syndicates on a deal by deal with various 90% - 95% LP investor / REPE firm. In this structure, each deal is unique & is not crossed with the other investments, and the GP earns promote in the project level waterfall for each (independent) deals. Then you figure out how to split profits between the Co-GP fund members thereafter (ig. another waterfall; cash flows may be crossed with other investments in the form of a GP Claw Back, or the investments may simply stand on their own).
Is the difference between European Waterfall and American Waterfall structure based on entire fund vs individual deals within the fund?
From an LP fund perspective, promote/ carry is paid on a PER DEAL basis in an American Waterfall. In a European Waterfall (more common), it is paid on the fund level.
However, in an American Waterfall, there are typically clawbacks (example: first deal is a home run and you get paid big carry, but second deal you round trip underperforms and does not hit your investor Pref...you will have to pay back some of your carry from the first deal)...
I have worked on both the REPE and REIT side. My experience was:
REPE: carry is paid when the GP takes a promote distribution from one of its funds. Employees were given an allocation of that carry depending on whether or not they worked on deals in the respective fund, had a hand in capital raising, or some other method for deciding who gets a piece of what. At my old shop, the carry cliff vested and you still had to be an employee when the carry was paid. I would say that is not market with most shops just having a vesting schedule. Note that the promote was taken on a deal by deal basis, but the LPs could clawback when the fund was fully divested if the GP was not in the promote globally. Note that co-invests typically provide a quicker route to hitting a promote since you essentially create a waterfall that is outside the co-mingled LP structure
Public REITs: you get RSUs that vest and convert to common. You typically get awards as part of your annual comp. At my shop, each award vests ratably over 4 years. Awards are all performance based and not really linked to individual deals.
Okay, so it seems the general consensus is "it all depends" as with anything in real estate. Certainly makes sense. I'm nowhere near carry as part of my comp, but since it's the cushy dream with private equity, I figured I'd try to get it straight.
Thanks all, and if there are any more posts I'll certainly read them.
Maybe not market, but at a REIT I used to work for, restricted stock was included as part of comp pretty early on (senior analyst level). Not a huge amount, but 5-10% of base.
Did your comp also include a year end bonus, or was this restricted stock package in place of that?
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