How do carry dollars at work translate into annual compensation?
I'm looking at the Heidrick and Struggles 2019 PE compensation report. The carry dollars at work definition (directly from the report) is as follows:
Carried interest is calculated using “carry dollars at work”—the expected return on total carry participation across all vehicles, based on achieving a net 2x return (above hurdle and after fees) in a vehicle charging a 20% performance fee. For example, 7 points (700 bps) of carry (out of a possible 100) in a $500 million fund with 20% carry would result in $7 million of carry dollars at work (500 X 0.2 X 0.07 = 7).
Using mean compensation for partner/MD's at a firm with 40bn or more AUM as an example, the report gives $1.2MM as total base + bonus compensation and $51MM for carry (all funds).
The cash + comp data was given for 3 different years (2017, 2018, 2019), but the carry (all funds) was simply given in a table. How would the $51MM carry dollars at work for all funds factor into annual compensation? Is more information needed to answer that question?
My take on this is that they are expected to make 51x2 (2x net return) = 102m over the liftime of the funds, so that would be in 10years.
Dollars at work assumes 2x moic and so if you're quoted 2m dollars at work you make 2m if the fund hits 2x (4m if it hits 3x and so forth). So the partners there make 51m over 5-10 years.
I might be wrong, but looking at his formula to get to the 7, he takes fundsize instaed of net return (2x 500) -> so 7m of carry dollars give 14 return, right?
A 2x return means the fund went from 500 to 1000. You only make money on profit remember (1000-50020%7). It’s 7m at 2x in the example.
I tend to agree with you now. The 'net' in 'net return' is a bit ambigious but 2x MM in excess of hurdle makes sense.
yea in any case op is being ambiguous this is an industry standard definition
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