Equity Carry in REPE

I am an associate at  a small REPE firm on the west coast (500AUM, should be closer to $1B by end of the year). My current comp is $80K plus $5k bonuses for each close, and we are set to make 4-5 closes this year. Additionally, I am told that I will be getting a promotion within the next 1-1.5 years. I am currently negotiating equity carry that is included in my offer, but I am not really sure how much I should be looking for. We are very small. only two on the acquisition team (including myself), and the founders are VC and FAANG higher-ups. The firm is treated somewhat like a startup due to the founders career path, and there are a ton of moving parts as we are expanding employment and winning bids on deals. 

How do I determine a starting point for negotiating equity carry, especially with a young firm? The carry is a 1-year vest and is on a per-deal basis, not per fund. This is nice because we have some deals we are working on that are only 5-year holds, rather than 10 years. Anybody have any insight into what other firms offer associates/director level for carry?

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Comments (23)

  • Associate 1 in RE - Comm
Jan 27, 2021 - 2:33pm

I got clarification, and it's slightly confusing for me, but deals are on average between $40M - $80M per, we are under contract with about $200M at the moment that I'll get carry in. The structure isn't based on the GP's profit, but rather the LP which I've never heard of before, and the founders therefore aren't partaking in carry only myself and the CIO. With that in mind the CIO only compensation is acquisition fee and carry so I'd assume that'll be the majority of the pool, but not sure how carry would look when it's only split between two people and based on LP profit?

Jan 27, 2021 - 2:49pm

Not sure if this will help but LP's usually have a preferred return they need to earn first before carry is paid. So perhaps that is the reference to LP profit? Also you can ask how the catch up works once the deal is in carry. Deal by deal carry is a better arrangement for an employee of the fund but just check that there aren't any whole of fund triggers or claw backs as LPAs tend to be more bespoke than you would think.

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Jan 27, 2021 - 3:47pm

Agree that 1%-3% is an appropriate range to expect for carry for anyone other than partners or senior execs. Your vesting structure is nice, as I've seen way worse. Deal-by-deal is amazing, as one shitty deal will not kill carry on all others. 

The range of 1-3% is dependent on deal size. Based on your quoted deal size ($40M - $80M), I would think carry would be closer to 1%. Also note that i am assuming this is total capitalization, and not equity stack. Because if it were equity, then definitely 1% or even lower.

Most Helpful
Jan 28, 2021 - 12:57pm

You and your CIO may be the only ones in the promote sharing pool, but I do not believe you have all of the facts with how this will work out. See two different scenarios below:

Your perceived promote sharing pool structure for your company: CIO + Associate are only ones in the promote sharing pool. You are assuming that this means that 100% of the promote generated will go to the CIO and you, meaning you are about to be making millions once the next major capital event happens.

My perceived promote sharing pool for your company: CIO + Associate are the only ones in the promote sharing pool. The promote sharing pool is a set percentage, carved out from what the founders will collect. For example, promote sharing pool is 10% of the total promote received, so you and the CIO will share this 10%. Of this 10%, you may get 10%-30% of that pool, however, when you calculate it back to the true % of carry that your company makes, you get to 1.0% - 3.0% of the total actual promote realized (which is what I was saying seems reasonable for non-partner or non-senior leadership roles).

I could be wrong, and if that's the case, you therefore are about to get the best carry I've ever heard of.

Think about it this way. Real estate investment companies like this make their money two ways: on fees and promote. Fees typically keep the lights on (pay salaries, rent for their office space, all of the other bs stuff that comes along with owning your own company, etc.) and the promote is where the founders truly make their money. They are the ones who have the true skin in the game, their reputation at risk, etc. I would be VERY shocked if they aren't taking the lion's share of the promote that is actually earned.

Just my two cents. Others can chime in to offer another perspective.

Jan 27, 2021 - 6:16pm

what do you think you would be entitled to? 50/50 split on all promote/carry? My gut tells me that your perception on the matter is incorrect (e.g. CIO and you are the only ones who are in the promote pool). 

Even if you are correct, what work are you doing to justify such a high %? 

If you are unsure how the promote sharing works, maybe start off by having a conversation and ask what their thoughts are? This way, you won't offend anyone (and potentially risk coming off as an entitled SOB). Hopefully you can anchor (a carry floor) and from here negotiate a higher position? Just FYI, don't be offended when he suggests a small, single digit % (potentially 1% or even lower).

  • Associate 1 in RE - Comm
Jan 27, 2021 - 6:24pm

No, my perception is not a 50/50 split lol. My perception is because it is only 2 people, which I spoke with my CIO today and he told me that it was,  would it be reasonable to get 5-10% until we hire more people? I've talked with the top head hunters I have a relationship with and they said typical is 1-2% at small firms, but even at smaller firms they typically have 4-5 sharing carry.. 

Jan 27, 2021 - 6:46pm

Curious on the details of the 1-year vest? Quite often, carry or other forms of promoted equity require staying till payout to earn payout. The exceptions usually involve making cash co-invest (even if from salary deferral). Does that literally mean you "own" the carry position if you quit after a year? Or that you have to "own" it (and work there) for a year before you can get distributions if any arise?

Jan 28, 2021 - 2:37am

You should request for this in writing. Often there is a carry plan, which isn't in my experience isn't provided to employees - so make sure you get a copy of the plan as well as your entitlement to participate in that plan.

Jan 28, 2021 - 10:01am

Hmm, the fact that the owners are from a VC, and you are winning bids to the point where you will double AUM in 1 year adds color as to who is in this market, their experience/thought process, and cost of capital... and it isn't good for me!  

Jan 28, 2021 - 5:23pm

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