Part of carried interest for Sr. Associate/VP in a small PE fund

johnnyPrim's picture
Rank: Chimp | banana points 2

What percent of the total carried interest do Sr. Associates/VPs usually get in a lower middle market PE funds?
For instance $100M fund with less than 10 people - 5 partners, 2-3 manager type of positions and 1 Sr. Associate or VP.

Also, if the Sr. Associate/VP were to negotiate other type of compensation, for example percent of the transaction fee in acquisitions or certain percent in the stock of an acquired company, what percent would be fair to negotiate? Again, this is a very small and entreprenerial firm, so I guess the percent could be larger because we are not talking about billions of dollars.

Thanks

private equity carried interest compensation at a smaller fund

So what does the carry look at smaller private equity firms? Here are some thoughts from the community.
from certified user @CompBanker

Expect anywhere between 0 and maybe 300 basis points. Many Senior Associate positions do indeed pay carry, although many do not.

As for the other types of compensation you listed, I agree with Alexpasch, you're nuts. Your best bet would be if the firm had a policy of paying out special bonuses to deal teams for completing transactions, but that certainly wouldn't be something you'd negotiate.

I'm talking about 3% out of 100%. 3% out of 20% is way too much for a senior associate /VP, even in a small fund. Expect the Partners (depending on how many there are) to take the lion's share of the carry with maybe 20-25% to be split amongst the other professionals (depending on how many there are).

from certified user @EuroLocust

While I personally think 1% feels a bit too rich, I think your calculation has some flaws as it omits hurdle rate and the fact that cash-on-cash it's maybe not that likely for a fund to double in 5 years. For an investment definitely but an entire fund will spread out its investments a bit so we come to the J-curve effect.

For simplicity, let's roll with your assumptions:
Initial investment: 750
Realized after 5 years: 1500
IRR: 15%
Hurdle rate: 10%
GP carry: 20%
Snr. associate carry: 1% (i.e. 19% left for remaining PE team)

Thanks to the hurdle, only when you reach a realized value of 1200, you start calculating carry.
So you have (1500-1200) * 20% = 60 for the firm or 300 * 1% = 60 * 5% = 3m for the senior associate.

Now I would think that you're more likely to look at a carry of 0.2% (1% of 20%) and then this is more like 600k for the associate.


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Comments (70)

Jun 20, 2011

It will be very small (if any).

You actually want a percentage of the transaction fee and/or equity kickers in the portfolio companies? What are you nuts? Lol damn you sure as hell have entitlement issues. Transaction fees paid to the PE firm are usually reimbursed to LPs or kept in the mgmt. company and go to the equity holders of it (i.e. not you). You are sometimes allowed to coinvest, but you don't get stock in the portfolio company for nothing. What you get is a bigger bonus if your portfolio companies do well.

Ask them what the bonus range is and whether you are allowed to coinvest in deals. That's all you need to know. If you get any carry, even 0.1%, be grateful; carry only really becomes standard once you reach Principal (so even higher than a VP).

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Jun 20, 2011

Expect anywhere between 0 and maybe 300 basis points. Many Senior Associate positions do indeed pay carry, although many do not.

As for the other types of compensation you listed, I agree with Alexpasch, you're nuts. Your best bet would be if the firm had a policy of paying out special bonuses to deal teams for completing transactions, but that certainly wouldn't be something you'd negotiate.

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Aug 24, 2012

..

Jun 21, 2011

Remember that all businesses are pyramid schemes, professional partnerships most of all, and that the pyramid you described is pretty top-heavy with you at the bottom. Priority of claims is going to feed those partner's mouths first and any carry or equity you were to get would come out of either the pockets of your seniors and/or your fund's investors.

Jun 27, 2011

Carry can be negociated even at that level. It really depends on the structure. You can get, as someone already mentioned, anywhere between 0 and a few basis points.

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Jun 29, 2011

im at a small fund ~ 100aum, sr. associate level, getting 100 bps

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Jun 21, 2011

Did you negotiate that? What is the standard for other people at your level and similar levels?

Jun 20, 2011

I'm talking about 3% out of 100%. 3% out of 20% is way too much for a senior associate /VP, even in a small fund. Expect the Partners (depending on how many there are) to take the lion's share of the carry with maybe 20-25% to be split amongst the other professionals (depending on how many there are).

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Aug 24, 2012

..

May 18, 2012

So in a good year, fund makes a 20% return, 10% over hurdle rate, 20% of $10 mm = $2mm of carried interest to go around. Only $300k per partner and $500k left for everyone else?

May 18, 2012

Where I work ($750mm fund), it's 10bps for associates.

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May 18, 2012
BabyBeluga:

Where I work ($750mm fund), it's 10bps for associates.

I assume this is something that is on top of a discretionary bonus? Seems light if this is your only form of incentive comp

May 18, 2012
CatsLHP:
BabyBeluga:

Where I work ($750mm fund), it's 10bps for associates.

I assume this is something that is on top of a discretionary bonus? Seems light if this is your only form of incentive comp

Correct. Discretionary bonus target is 45% of base.

May 21, 2012

Carry will normally be calculated as points out of 20 (as in 20% carry) so it will usually look something like this for a c$100m Fund:

Managing Partner / Founder - 5pts
2x Partners - 4pts
2x VPs - 1.5pts
CFO - 1pt
Back office - share of 1pt
4x associates - share of 2pts

Obviously with a huge amount of variability

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Aug 24, 2012
samoanboy:

Carry will normally be calculated as points out of 20 (as in 20% carry) so it will usually look something like this for a c$100m Fund:

Managing Partner / Founder - 5pts
2x Partners - 4pts
2x VPs - 1.5pts
CFO - 1pt
Back office - share of 1pt
4x associates - share of 2pts

Obviously with a huge amount of variability

Thanks for the info. That is very helpful. I noticed your use of c$, so is this distribution the norm among Canadian PE firms?

Also have you seen cases where funds offer deal specific carry for VP/director/other non-partners who bring in a deal on their own?

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May 21, 2012
brandon st randy:
samoanboy:

Carry will normally be calculated as points out of 20 (as in 20% carry) so it will usually look something like this for a c$100m Fund:

Managing Partner / Founder - 5pts
2x Partners - 4pts
2x VPs - 1.5pts
CFO - 1pt
Back office - share of 1pt
4x associates - share of 2pts

Obviously with a huge amount of variability

Thanks for the info. That is very helpful. I noticed your use of c$, so is this distribution the norm among Canadian PE firms?

Also have you seen cases where funds offer deal specific carry for VP/director/other non-partners who bring in a deal on their own?

No idea about Canada.

Deal-by-deal happens but given that the preferred return will be fund-wide, any deal by deal carry will likely be held in escrow in case there is a clawback.

Deal-by-deal is more the norm in VC.

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May 21, 2012

fyi - point above, associates are post-mba - pre mba would get a bonus from the management fee as they are unlikely to be at the fund long enought to see the Fund reach preferred return and carry.

Jun 4, 2012

Looking at an opportunity at a small VC fund Typical investment of $3 - $5 million with ~$30 million AUM thus far. There are two partners, a Principal, and I would be the third member of the investment team (Sr. Associate type role). Compensation will be salary and carry only (i.e., no annual cash bonus).

What would be an appropriate carry to negotiate? I know salary will be slightly below market due to the structure of the fund so I'll want to make up for the difference in upside (carry).

Thanks in advance for any guidance

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Jun 27, 2011
mtones9:

Looking at an opportunity at a small VC fund Typical investment of $3 - $5 million with ~$30 million AUM thus far. There are two partners, a Principal, and I would be the third member of the investment team (Sr. Associate type role). Compensation will be salary and carry only (i.e., no annual cash bonus).

What would be an appropriate carry to negotiate? I know salary will be slightly below market due to the structure of the fund so I'll want to make up for the difference in upside (carry).

Thanks in advance for any guidance

Say overall carried interest is 20% over 8% annual hurdle rate.
In my opinion you could be entitled anything between 1.5% and 10% of this 20%, depending on your employers' generosity.

Apr 20, 2014

What did you end up negotiating mtone9? I am in a similar situation at a $20 million fund.

Apr 20, 2014

What did you end up negotiating? I am currently being offered a VP role at a small VC (Fund I $20m) and negotiating carry. I think 1.5 to 3 (out of 20pts) seems appropriate, given 1 Managing Partner, 2 Venture partners and 1 Senior Advisor in line above me. Plus they all have invested funds (totaling about $3 million) and I do not. Thoughts anyone?

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Apr 23, 2014

Wait, my mind is blown. So you're telling me that if you work for a 750mm fund that doubles the fund size in 5 years (15% irr), then the carried interest is 1.5bn-750mm*20% = $150mm? And that a freaking snr. associate can get 1% (out of the 20%); i.e. 5% of $150mm?

That's 7.5 million dollars... There is no way it's 1 out of 20. That's just ridiculous cash and taxed at only the capital gains rate too.

Aug 24, 2012
miscer:

Wait, my mind is blown. So you're telling me that if you work for a 750mm fund that doubles the fund size in 5 years (15% irr), then the carried interest is 1.5bn-750mm*20% = $150mm? And that a freaking snr. associate can get 1% (out of the 20%); i.e. 5% of $150mm?

That's 7.5 million dollars... There is no way it's 1 out of 20. That's just ridiculous cash and taxed at only the capital gains rate too.

I doubt any $750m fund is going to give 5% or even 1% carries to Sr associate/VP. Perhaps 1% for principals.
The examples above were about a small startup-ish fund with only $100m and a very lean structure with only a few employees.

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Best Response
Apr 23, 2014

While I personally think 1% feels a bit too rich, I think your calculation has some flaws as it omits hurdle rate and the fact that cash-on-cash it's maybe not that likely for a fund to double in 5 years. For an investment definitely but an entire fund will spread out its investments a bit so we come to the J-curve effect.

For simplicity, let's roll with your assumptions:
Initial investment: 750
Realized after 5 years: 1500
IRR: 15%
Hurdle rate: 10%
GP carry: 20%
Snr. associate carry: 1% (i.e. 19% left for remaining PE team)

Thanks to the hurdle, only when you reach a realized value of 1200, you start calculating carry.
So you have (1500-1200) * 20% = 60 for the firm or 300 * 1% = 60 * 5% = 3m for the senior associate.

Now I would think that you're more likely to look at a carry of 0.2% (1% of 20%) and then this is more like 600k for the associate.

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Apr 23, 2014

And remember that the fund must have done very well to hit this number and that the 600k is across 5 years (about 120k annualized), which would especially make sense if your discretionary bonus is ">PE fund).

Aug 24, 2012
EuroLocust:

While I personally think 1% feels a bit too rich, I think your calculation has some flaws as it omits hurdle rate and the fact that cash-on-cash it's maybe not that likely for a fund to double in 5 years. For an investment definitely but an entire fund will spread out its investments a bit so we come to the J-curve effect.

For simplicity, let's roll with your assumptions:

Initial investment: 750

Realized after 5 years: 1500

IRR: 15%

Hurdle rate: 10%

GP carry: 20%

Snr. associate carry: 1% (i.e. 19% left for remaining PE team)

Thanks to the hurdle, only when you reach a realized value of 1200, you start calculating carry.

So you have (1500-1200) * 20% = 60 for the firm or 300 * 1% = 60 * 5% = 3m for the senior associate.

Now I would think that you're more likely to look at a carry of 0.2% (1% of 20%) and then this is more like 600k for the associate.

Most GPs, assuming they have any bargaining power vis a vis their investors at all, do negotiate for catch up provision for their funds thou so once they pass the 10% hurdle they get carries off the entire amount of profits realized (750) and not just the amount above the hurdle (300). Having said that, even 1% out of 100 is too high for an associate for a fund of this size. Maybe all the associates at the firm share 1%.

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Feb 20, 2015

This math doesn't work.. the hurdle is irrelevant once you've crossed it, because there is usually a GP catch-up period, so that effectively, GP makes 20% of all profits and LPs make 80%.... So, if you were to indeed double a 750m fund, the 750m "profit" would be divided 20/80 in the end.

Apr 23, 2014

10bps is 0.1%

Apr 23, 2014

People are saying it's between 0 and 300bps. Plus that guy corrected this post and said he meant 50 bps. Given that, 100 bps is pretty reasonable no? Just seems pretty crazy

Jun 20, 2011

I have a few data points combined with one of the PE reports that breaks out PE employee compensation by fund size, position, and compensation type. In general, a Senior Associate / Vice President gets carry at about half or 2/3rds of the funds out there. At a $1bn fund, you can expect to get anywhere between 0.0% - 1.0% of the carry. Obviously a lot depends on how lean the team is and how generous the Partners are, so carry percentages can swing wildly. Note I'm treating the Senior Associate / VP title as a single position because a lot of firms don't have both. I roughly equate it to someone up to a few years out of business school.

Feb 20, 2015

I was at a $1 billion fund and VPs (there was no real Senior Associate position) were generally in the 1% range, though there were a few more senior VPs that were closer to 3% (these guys were about to make Senior VP though). I happened to get 50 bps as an Associate but that was pretty rare.

I'd say 1% with the possibility of another 1+% a couple years down the line is a decent ask.

Feb 20, 2015

Agreed that 0 - 100 bps sounds about right based on my experience although it really is fund specific and contingent upon partners' generosity and/or desire to adequately incentivize junior/mid-level guys. I will say that participation in the carry or co-invests does change the motivation/incentive structure as it is always nice to play for the ups. Would you consider taking lower initial comp in exchange for a greater % (assuming that was an option)?

Feb 20, 2015

tpg real estate?

Feb 20, 2015

Thanks gents. Very helpful. Wish me luck!

I would indeed take lower initial comp by the way

Apr 23, 2014

^^ Makes a lot more sense. Thanks guys sb'ed

Feb 20, 2015

have you checked capiq?
im not sure up to date information is available for that kind of stuff..

happy to give advice; no asking for referrals please

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Feb 20, 2015

why do you ask pointless questions bro... woh cares either you get paid or don't get paid, some internet forum is not gonna give you answer for this

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Feb 20, 2015

You're both idiots (above).

A good proxy would probably be some of the sourcing-heavy shops that pay associates deal bonuses for sourcing deal. I could be mistaken, but I thought Summit paid associates something like $40-80k for sourcing a deal. Its certainly not some chunk of the deal size, so if you think you're getting several million dollars, I'd forget about that possibility real quick.

Jun 20, 2011

brandon st randy is correct that your calculation of carry is incorrect. I've never heard of a MM fund that doesn't have a catch up provision. Also, returning 2.0x Cash on Cash for a $750mm fund is hardly revolutionary. I'd say it is anywhere from average to conservative. Some people I know calculate their expected carry based on a 2.5x return. So the math looks something like this:

Fund Size: $750mm
Return: $1,500mm
Profits: $750mm
Carry for entire GP: $750mm * 20% = $150mm
Value of 1% of GP (on 100% scale) or 20bps on a 20% scale: $1.5mm

This is paid out over the lifetime of the fund (up to 12 years) and it is unlikely that any carry will be paid out before years 5-7. So a senior associate can expect their carry to be worth a few million over the life of the fund. This may seem absurd but it is the reality.

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Aug 24, 2012
CompBanker:

Value of 1% of GP (on 100% scale) or 20bps on a 20% scale: $1.5mm

This is paid out over the lifetime of the fund (up to 12 years) and it is unlikely that any carry will be paid out before years 5-7. So a senior associate can expect their carry to be worth a few million over the life of the fund. This may seem absurd but it is the reality.

Obviously it matters at which point of a fund's life cycle does a new employee get hired in and get on carried schedule for. It would be really sweet if you come on board with 1% one year or two before a fund is being distributed and cash in millions from that. I believe most firms would have policy in place that determines who gets on the carried schedule for which fund and when. Normally you would not expect a big payoff from a fund unless you have worked through a good part of its lifetime and contributed accordingly.

Given the long timeline of a typical buyout fund, by the time it is paying out carry interests an associate who joined in at its inception would in all likelihood have either been promoted to a more senior position hence getting higher carries or left the firm.

Jun 20, 2011
brandon st randy:
CompBanker:

Value of 1% of GP (on 100% scale) or 20bps on a 20% scale: $1.5mm

This is paid out over the lifetime of the fund (up to 12 years) and it is unlikely that any carry will be paid out before years 5-7. So a senior associate can expect their carry to be worth a few million over the life of the fund. This may seem absurd but it is the reality.

Obviously it matters at which point of a fund's life cycle does a new employee get hired in and get on carried schedule for. It would be really sweet if you come on board with 1% one year or two before a fund is being distributed and cash in millions from that. I believe most firms would have policy in place that determines who gets on the carried schedule for which fund and when. Normally you would not expect a big payoff from a fund unless you have worked through a good part of its lifetime and contributed accordingly.

Given the long timeline of a typical buyout fund, by the time it is paying out carry interests an associate who joined in at its inception would in all likelihood have either been promoted to a more senior position hence getting higher carries or left the firm.

It is possible to join a firm and get carry for a fund that has been around for a few years. However, they aren't going to give you the full amount of carry that you would have received had you been there at the fund's inception. You will get some pro rata amount and still have to vest that carry over a number of years. Basically, there are safeguards that prevent you from cheating the system. The carried interest percentages I stated above are for someone joining or present at the fund's inception.

I don't have direct data for someone who receives a promotion in the middle of the fund's lifecycle. However, I imagine that it is unlikely they will get a meaningful bump in carry. Most promotions (from what I've seen) occur when a firm raises a new fund. As such, I imagine they give out the higher level of carry to the promoted person in the NEW fund rather than adjust the old fund. So if a new fund is being raised every five years, a senior associate will probably get promoted to VP when the new fund is raised and given VP-level carry in the new fund while retaining senior associate carry in the old fund. This is just a guess though -- I'm sure every firm has their own way of doing things.

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Feb 20, 2015

I'm not a PE guy, so I can't answer your question. However, I just wanted to mention I nearly fell off my chair from laughter after reading that the fund you might receive an offer from has $500 AUM.

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Feb 20, 2015

My firm offers co-invest and I just look at how much our fund has outperformed the market historically and consider how much I invest each year. You should then discount that because of liquidity and because they might not continue to generate outsized performance. If your fund hasn't outperformed the market, then you probably have bigger issues.

It can actually be pretty meaningful if your firm consistently does 3x+.

Apr 26, 2014

To clarify is it standard that when someone talks about the points they have in the fund that they are referring to points out of 20% (gp's cut of the profits) rather than points out of 100?

Apr 26, 2014

I get anywhere from 50bps-500bps depending on the deal.

Apr 26, 2014

Same.

Aug 24, 2012
mrb87:

I get anywhere from 50bps-500bps depending on the deal.

How does that work? Do you have contracts in place with your firm stipulating what you are getting for each deal in a given fund?

Apr 26, 2014
brandon st randy:
mrb87:

I get anywhere from 50bps-500bps depending on the deal.

How does that work? Do you have contracts in place with your firm stipulating what you are getting for each deal in a given fund?

Nah, just depends on the deal, how many people are on it, and my role/importance.

Aug 24, 2012

Looks like something is unraveling in the House of Apollo.

Scott Ross, 33, just became the latest and youngest partner to leave Apollo Investment Management. This follows a string of departures of other younger partners at the firm after Apollo changed its compensation structure so that carries are now paid out in shares rather than cash, and vested over a 3-year period after exit. Since 2008 Apollo lost almost half of their younger (than 50) partners.

I wonder where will Ross and others go from here. Will they be starting their own shop or looking for partner level gigs at other mega/higher MM PE shops? How are they going to navigate their non-compete? Perhaps Scott Ross can hire his cousin Mike Ross to help him get out of that.

Also will other publicly traded PE shops like Oaktree, KKR, Blackstone and Carlyle follow suit by adopting the same stock based compensation structure? This new structure is much more similar to the stock options granting practice of other corporations so will this mean that these investment powerhouses will be run more like a Fortune 500 than an investment partnership? There have been discussions about how becoming publicly traded affected the company cultures and morales of shops from GS to Moellis, usually for the worse. I wonder if the same will also happen to the publicly traded alternative investment shops.

Incidentally, Scott despite his young age, has been a 10 year veteran at Apollo, having joined the firm after a stint at GS Merchant Banking division. And he didn't even bother to quit to get his MBA either.

May 17, 2014

I'm 1st year VP for a small real estate private equity firm - 20 employees, 1 partner / founder, 1 MD, 3 VPs. and am currently negotiating carried interest compensation structure. We only have separate managed accounts in a 2%/20% fee structure (no hurdle) and I personally close deals of approximately $30m equity invested per year . Any idea / help on any of the below?
1) What percentage should I expect on the individual deal basis? If the equity is doubled every 5 ys: $30m*20%=$6m. To me 5% = $300k would make sense given that this will be on an annual basis and over and above the bonus and salary but I was curious what you guys think.
2) Perhaps I can negotiate 5% more in 2 year down the line?
3) Do you think it makes sense to have no vesting period after exit? Does anyone know what the market is?
4) What is market if one leaves the company? Is the carried interest immediately terminated or there is room for buyout?

Thanks!

Oct 13, 2014

"REPEVP PE
on 5/17/14 at 7:45am
I'm 1st year VP for a small real estate private equity firm - 20 employees, 1 partner / founder, 1 MD, 3 VPs. and am currently negotiating carried interest compensation structure. We only have separate managed accounts in a 2%/20% fee structure (no hurdle) and I personally close deals of approximately $30m equity invested per year . Any idea / help on any of the below?
1) What percentage should I expect on the individual deal basis? If the equity is doubled every 5 ys: $30m*20%=$6m. To me 5% = $300k would make sense given that this will be on an annual basis and over and above the bonus and salary but I was curious what you guys think.
2) Perhaps I can negotiate 5% more in 2 year down the line?
3) Do you think it makes sense to have no vesting period after exit? Does anyone know what the market is?
4) What is market if one leaves the company? Is the carried interest immediately terminated or there is room for buyout?
Thanks!"
-----------------------------------------------

Anyone have any insight from a real estate perspective? Thanks

Oct 13, 2014

Dude, I got carry in the last fund I worked at only BC I raised 20% of the total fund and it was only 1%. good luck if you get more than 10bps

Oct 14, 2014

Wait, regarding the perf fees calcs (carry) I thought that if a fund has a hurdle rate of 8% it will only charge perf fees only on the additional percentage points above that 8%. So, say 15% irr, the fund is going to charge that 20% perf fee only on the extra 7% points of overperformance (=15%-8%).

Colourful TV, colourless Life.

Jun 20, 2011
Bonus:

Wait, regarding the perf fees calcs (carry) I thought that if a fund has a hurdle rate of 8% it will only charge perf fees only on the additional percentage points above that 8%. So, say 15% irr, the fund is going to charge that 20% perf fee only on the extra 7% points of overperformance (=15%-8%).

Nope. There is usually a catch-up provision that puts the GP even with the LPs after the hurdle is crossed. So 10% IRR = 8% to LPs 2% to GPs (80/20).

May 2, 2017

Are carried dollars at work taxes as carried interest, or since no principal was outlayed would it be considered more akin to a bonus for taxation purposes?

May 12, 2017

very small fund. what about a non-traditional pe firm that raises deal by deal like direct?

Sep 21, 2017

Take what you want from my experience. I have 3% in the firm as a share of dividends. My firm isn't a fund but more of a family office doing VC deals. I am at Director/Principal level.