Does carry mean equity in the PE firm?
Is getting carry in a fund the same as having equity in a PE firm? I assume this applies to the Partners only, but do they own the firm itself or are they just getting a large carry portion?
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Titles can be a bit confusing because different firms have different hierarchy structures - legally, being an owner in the GP carries a title "Managing Member", and not all "Partners" may be Managing Members as well (although there is often overlap). Carry isn't related to any business ownership and is simply a profit share - you're getting X% of the performance fees generated from a given fund.
Thanks, this is very helpful. I'm curious about the additional incentive to be a "Managing Member" instead of a normal Partner with carry. I assume the only added benefit would be at a liquidity event where the owners can cash out. And maybe greater control over the firm. Do you know how common it is for Partners to become equity holders and if this is more common in large funds or small ones?
I'll caveat that my experience here is more limited, but Managing Members are owners of the GP so they have business control / decision-making in addition to economic interest in the firm (distinct from just carry); my understanding is that the economic interest entitles the owners to profit / loss share of the GP beyond just carry points, if applicable in addition to the potential cash-out liquidity like you said. I think most PE firms have a limited number of Managing Members and a broader group of Partners / MDs. Usually the Managing Membership is concentrated with the founder(s) and I think its fairly rare for a regular Partner to just get elevated, barring a succession event.
Say PE firm raises $10B fund with 2/20 economics.
2 refers to 2% management fee which typically lasts for a fund’s investment / harvesting period (say 10 years). So each year, the example PE firm will earn $200M from the $10B fund. This is used to pay business expenses and bonuses (e.g. back office salaries and cash bonuses come out of this pool). Then the remaining profits will be shared among the general partners, or simply, the owners of the firm. This group of owners will most likely be the founder(s) and “managing partners” or those that are part of the investment committee. The lions share will be owns by founder(s); however, with each leadership succession, there is a buyout where the younger leadership will buy out the old leadership. This is the reason why succession in PE is so difficult because it is effectively founder(s) giving up control of their company. Also, investor such as Dyal can be part of the GP ownership group (usually 20-30% stakes to provide liquidity to “billionaire” PE founders who have most of their net worth tied to the ownership of the PE firm).
20% is the carry pool. Carry pool is basically performance based profit sharing where LPs (limited partners or investors) tell the GP (general partners or the PE professionals) that they will share 20% of profits above a [8%] hurdle rate. Simplistically, first 8% returns will go to the LPs, then GPs get to “catch up” (so that the profit split is 80% LP and 20% to GP), and then from there 80% / 20% split continues. This carry pool is split up among all PE professionals (typically senior associates up to the founder(s)). This carry pool does not give ownership of the GP/the PE firm itself.
Thanks for the explanation. Can you elaborate on how succession works? How does the younger leadership buyout the older leadership? Seems like a big check to write considering founders/older partners have interests worth multi-million/billion.
You're conflating being a part owner of the management company and getting a % of the carried interest paid out by a specific fund.
Most professionals, even the senior ones, in PE are not part owners of the management company and simply are allocated carry in every fund they work on. Management company ownership is mostly reserved for founders (they get the lion's share) and / or people who have bought into the ManCo.
Being a part owner essentially means you have access to distributions of any residual fees (management fees and carried interest from all funds) not earmarked for future investment after all expenses have been paid. It also means you participate in the equity upside in the case of the firm being sold on or IPO'ing.
ManCo ownership is part of the reason (the other is LP level returns on their assets sans fees) why founders of these successful private buyside firms become so exceptionally wealthy.
Appreciate the helpful comments-- really clears things up for me. I'm wondering at why/when new partners buy into the ManCo. For example, Jon Gray is a billionaire on paper because of his shares in Blackstone. I assume there were multiple people that bought into the firm at some point. Wondering how common this is at other firms and how many people are actually a part of the ManCo.
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