Co-invest and Carry: What happens if you leave the firm?
Can someone please explain their experience or broadly how separately both co-invest and carry works if you receive it let's say as an associate and then you leave the fund later on?
Is there a vesting period / would you be able to still be invested if you left or do you exit that investment immediately?
Thanks!
following
Speaking for my fund:
Co-invest - if you leave, firm has a call option to purchase your investments at the current mark at the time of your departure. If they decide to exercise the call right, the future co-invest commitment goes away. I've seen them exercise the call right and not, depending on the circumstances of the departure
Carry - has a vesting schedule. You forfeit unvested carry when you leave, you retain vested carry (unless fired for cause)
Helpful thanks - From a coinvest perspective, what type of liquidity do you have and from the firm's standpoint if they do exercise that call option, how do they define "current mark"?
If you invest for simple terms $1,000 into a fund, and you leave 2 years later - if the fund hasn't exited any investments or hasn't taken money off the table yet what are you receiving, $1,000?
There is a fair value mark that’s determined periodically, typically quarterly. These are provided to LPs, which you are. My guess is price for the call would be based on that.
For carry, worth noting that for some firms you’ll forfeit all, vested and unvested, not only if you are fired for caused but also if you are a bad leaver (going to competitors for instance)
Got it. Long story short, they do periodic valuations of their businesses (realized and unrealized) value and pay it out. Is there a call premium/discount or something?
If the firm doesn't call, then do you keep your investment in fund until it closes or how does that work?
In a new fund, all employees will commit a certain amount of capital. That capital then gets called for each deal / equity investment. If you leave and the firm exercises its call, it will look to its most recent quarterly valuation and pay you the value of the assets you invested in. You have no further commitment to the firm / fund. If the firm does not exercise its call, no cash changes hands, you are required to continue to fund capital calls up to the amount of your commitment, and you are a no-fee LP in the fund until the fund is wound down.
Thank you -
Is there a way to find out if a fund is open-ended or has a "end" date? When you refer the wound down, I assume you mean the fund has essentially come to its 5/7 yr maturity or x amount of years.
If you leave and the firm does not exercise the call, is it common to stay in touch with a firm you had left to get updates on your investment?
Private equity is by definition closed-ended since its based on committed capital - you couldn't ask an LP for a perpetual commitment. Typical commitment periods are 5-7 years, with 5 years of harvesting after, so traditional PE funds are 10-12 years in length.
More relevant to these co-invest questions than fund period is the timing when the underlying fund assets are sold (3-7 years being typical LBO holds). When a PE firm sells an asset, unlike a hedge fund, it typically does not get to reuse that capital for a new investment (recycle period caveats etc.), but rather returns it to its investors. So if you leave your firm and your co-invest remains outstanding, that investment will be fully monetized when the firm sells the portfolio. And if you leave during the commitment period, you will need to continue to invest up to your commitment amount (which will come back to you when those underlying assets are sold).
If no call is exercised, you would need to stay in touch with the firm so that they could send you capital calls, wire you proceeds, and issue you K-1s. Like any LP, an employee co-invest comes with information rights. For administrative and privacy reasons, firms are likely to exercise their call right as they don't want to have to deal with what is often a five-figure commitment from a former associate.
My fund basically works like this:
You commit $x toward co-invest, constituting some minuscule portion of the overall fund and while you're there every time a deal is closed and there's a capital call, your percentage of the entire fund is pulled out of your committed capital, just like any other LP. So on and so forth until the fund is fully invested.
Once you leave, your existing co-invest stays as-is until there is a liquidity event and you are paid out according to whatever account you already have linked. You are no longer afforded the opportunity to invest in future deals and the remaining portion of your capital commitment is voided. I believe any leverage you might have taken on needs to also be paid-back at that point.
Go it and the above responder mention this but you retain the no fee / no carry perk despite you leaving correct? I.e. they don’t start deducting fees on your coinvest since you’re no longer an employee?
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