Comments (21)

  • Senior VP in IB-M&A
Jan 11, 2022 - 9:01am

That is not normal.

Carry vehicles are typically set up before a fund does its first investment so it has "no value" - you can't pay for something that has no value. This avoids any kind of taxable event.

However, if either: (a) the fund gets invested and is marked above a 1x before the carry pools are finalized or (b) you join the carry pools after they were initially created there may be a few outcomes:

  1. Firms will often have to "catch up" carry participants so they don't pay any tax upon entry (since is due to assets being marked up in value). Typically your carry will be marked as a 1x and over time they will increase its valuation by unlocking some of the unrealized gains - avoids you paying tax.
  1. The second option is to "buy" the carry but since it isn't in the money you're technically just buying a piece of paper. Some firms will use a note to buy the carry for staff. Never ever have I heard of staff having to pay for carry as carry is an incentive to keep staff around and creates alignment with LPs. That is not alignment.
  • Analyst 2 in IB-M&A
Jan 11, 2022 - 9:53am

Isn't there a GP commitment required for each investment professional to participate in the carry pool at most firms? I guess that's different from buying a "carry share" though.

  • Analyst 3+ in PE - Other
Jan 11, 2022 - 10:05am

Actually let me rephrase:

Commitment on day 1 in the carry vehicle is PS0 per unit (or more if a participant gets hired later in the fund life). Then carry holders have to "commit funds" during the fund investment period until each unit reach a PS10,000 value. 

My main question was regarding the requirement to actually put my own money to purchase a full unit of carry while it seems like most other funds just give them for free (when people say they get allocated xx bps of carry for exemple they seem to earn that as a bonus and not put any money upfront). 

In my fund carry holders basically contribute to the carry pool at the same time as LPs gets called for funds.

Is that normal?

  • Senior VP in IB-M&A
Jan 11, 2022 - 10:17am

So, if you don't pay anything to enter the pool (the carry is marked up in value) you're diluting the existing unit holders value. For this reason there needs to be a payment, but the payment is always done as an equalization from the management company on behalf of the employee, never the employee himself.

Carry isn't a bonus. It's part of your compensation package and is expected at the more senior levels, otherwise people simply leave and join other firms that treat them better.

Your firm should be "buying" your entry into the carry pool for you via a note. The note can contain interest so when you are fully vested it reimburses the firm the small fee. You, however, should not have to pay for it. That's just not market.

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  • Analyst 3+ in PE - Other
Jan 11, 2022 - 11:07am

Well I guess I'm getting screwed. Employees are paying themselves and the company is not buying anything for anyone lol.

For exemple, lets say a principal is getting hired 40% into the fund life, he gets allocated 10 units (that reach 10,000 value when fund is fully invested) so he has to pay 10*10,000*40%=40,000 when he gets hired (usually one year later when first bonus gets paid) then rest of the money gets called until end of investment period (say year 5) and he gets his money back+carry at year 10.

Investment team members are basically "investing" their own money in the fund with goal to generate some alpha (or a lot more than index funds return)...

Some people at my firm are taking loans to bridge their carried interest participation (we even have a partnership with a bank to structure the loan as bullet repayment). 

Also, before reading WSO, it seemed more or less logical for me to commit some of my own money as it gives me an incentive to stay until the end of the vesting period.

Would be curious to know if any fund have the same structure as mine. 

Jan 11, 2022 - 7:24pm

What do you mean you get "paid back at end of vesting period"? Carry pays when returns are calculated ie post (most of) harvesting.

Aren't you confusing carry with co-invest? I don't want to insult your intelligence but never heard of "paying to get carry"

  • Senior VP in IB-M&A
Jan 11, 2022 - 8:19pm

I have heard of firms TRYING this on for size but never have I seen it implimented as no one in their right mind would buy into a carry pool as an employee.

The pay back is the equalization. It all nets out in the end, but you're short $$ upfront and take on unnecessary market risk.

  • Senior VP in IB-M&A
Jan 11, 2022 - 8:20pm

Funnily enough I heard from our BO that the partners want our GP entity to start paying various registration and accounting maintenance fees for the carry pool as opposed to the corporation paying it. So while I have carry I am also paying down a small amount of debt/expenses to administer this POS. Not uncommon.

  • Senior VP in IB-M&A
Jan 11, 2022 - 8:32pm

My shop has many business lines, including a fund of funds and I can't imagine we would ever pass your firm on our operational DD if we found out employees had to actually buy into carry. LPs want their GPs staff to be well compensated so they stay. The way your fund has it structured makes it fair for the senior partners (who definitely won't need to vest) while staff get screwed.

  • Analyst 3+ in PE - Other
Jan 12, 2022 - 3:20am

Well technically, carry holders are very well compensated at the end (long vesting period though). Carried is allocated to some analysts and all associates but only mandatory for principal and above. Definitely harder for me to keep some money aside to invest into carry than for someone getting paid a lot more.

  • Senior VP in IB-M&A
Jan 12, 2022 - 9:02am

It sounds like a small fund if carry is being allocated to analysts and associates. In my experience it is pretty rare for them to get carry unless they joined the firm at the inception or if it is a small fund.

Jan 12, 2022 - 5:08am

Are you sure you're not confusing this with co-invest? Have the words carried interest been explicitly used or are you speculating that this is buying into the carry pool? First time for me to see this tbh. 

“Self-control is strength. Right thought is mastery. Calmness is power. ” - James Allen
Jan 12, 2022 - 5:48am

Neither - Emerging Markets.

Been in the business for 12 years, first time to hear this. Well one's always learning in PE :) Sorry couldn't offer much help.

“Self-control is strength. Right thought is mastery. Calmness is power. ” - James Allen
Jan 12, 2022 - 3:54pm

If this is the UK it may be due to tax laws for carried interest. It is an ongoing debate I believe and it might be easier to argue carried interest can be charged at capital gains tax rate vs income tax rate if some capital is at risk.

  • Senior VP in IB-M&A
Jan 12, 2022 - 3:59pm

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