Heidrick & Struggles Report: Carry for VPs?
I'm referencing Heidrick & Struggle's 2017 Report (Google: Heidrick and Struggles 2017 Private Equity since I can't post links)
My question: is the average VP making millions in carry? For example, page 17 shows the median VP carry for $1 billion AUM fund is $2.5 million. I'm assuming that's annualized carry.
I understand the basic premises of how carry works, i.e. is distributed, as a percentage of total after a hurdle rate, over the life of a fund, etc. but I don't understand how multi-millions can be a median figure.
I don't think your typical VP is pulling in $2.5M a year in carry. But the economics of carry are powerful.
Walking through some super rough math:
Let's say you have a $1Bn fund that does well and returns 2.5x over the life of the fund.
Classic 2/20 structure
The GP gets 20% of net gain of $1.5Bn, or $400M
Huge variation in carry for VPs, but let's say 1% - 2% of the GP share (20-40 bps of the overall fund).
That means $4-8M over the fund life, and if we say a 10-year life, that's $400-800k of carry per year.
I don't have that many data points, so others can correct me if this is way off, but I've seen the above scenario happen. APAE any thoughts?
What's up Layne Staley.
(Yo Patrick WallStreetOasis.com, I came across this thread on my own and saw myself tagged but didn't ever get the notification, something may be wrong with the system and worth looking into.)
Your math is right.
Here are some ways I can see the $2.5m number being correct.
One, it could be multiple vehicles stacking up. Some firms keep people at the Vice President level for a long time, like five years. You could be ripping high six- or low seven-figure checks from three vehicles at the same time (Fund VII, Fund VIII, and Opportunities Fund III).
Two, some firms use different title schemes, so what may be the final pre-partner title at one shop ("Vice President") might be two titles away from partner at another (that uses "Principal" as well). This would mean some people are getting way more meaningful carry allocations than other people with the same title, kind of how "analyst" in the hedge fund space can mean anything from a 24-year-old who finished one year of banking at Goldman before moving over to Maverick (earning $400k) and also a 38-year-old at a lean shop like Bridger (earning $8m).
Three, carry allocations are probably higher than you think. Private equity is an incredibly opaque market, and senior compensation is part of that. Personally, I'd never be comfortable giving someone I like well enough to have as a VP at my fund something as small as 2% of the carry pool. Some people are that stingy, so it's realistic, but realize that there are funds where (a) the founder is kind enough to put mid-senior guys into meaningful economics or (b) the guy is sharp enough to negotiate aggressively for himself.
As an example, I know two guys that were in the same analyst class, bank, and group. They went into two different megafunds. One went to HBS and one went to CBS (white guy, nothing special GMAT) and thankfully got into the VIP there. The HBS guy had the literal highest datapoints on the comp report for his graduating class. He was amped and bragged in our social circle about it.
Two years later it got out that the CBS guy printed high seven figures at the end of that year. Everyone was shocked, I wasn't. That guy is a quiet killer. His offer was at a 'private equity' fund that focuses on special situations or off-the-run opportunities and has a lean staff. Think 9 people running a $3b main vehicle and $1b side vehicle. He obviously negotiated good economics, and the fund did over 30% that year.
Do the math. Let's say the carry pool was $200m blended across the two vehicles. There's one founder who takes half the pool and has 8 guys dividing the other half. Two senior guys probably take 10% each, so six guys have to divide 30%. I wouldn't be surprised if his job offer came with 2% of the carry pool and he negotiated double that. 4% on $200m is $8.
Any way, what I'm trying to prove is that there's a host of reasons that $2.5 could be real. It's an opaque market, and that's the whole thing H&S is trying to address by publishing that report.
FWIW I know VPs on the venture/growth side getting $1M in carry dollars in ~$500M funds, so ~1% of the carry pool. This on a fund level, not annualized. So it's very possible for comparable roles at larger PE funds getting several million.
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