Have a question for all the PE guys here. I've been trying to figure out if the carried interest I get paid (middle level guy..senior associate/VP) is market. My fund based out of SF focuses on the middle market, but we have a decent fund size (between $2 and $2.5 billion).
I receive 0.5% carry on the latest fund, which based on some research I've read is average. However, I've heard rumblings from buddies of mine that it is on the smaller end of the scale. That said, they're not even in PE so i don't know if I should trust them.
Anyone care to share what their experience with carry has been?
Private Equity Carry
From the Wall Street Oasis Finance Dictionary
In Private Equity, carry is the profit earning between buying a business and then selling it and this is the key component of senior compensation. Mitt Romney of private equity firm Bain Capital earns the vast majority of his salary through his stake in Bain Capital and the resulting carried interest profits.
- 2 billion dollar fund * 2.5x ROIC less $2bn return of capital = $3 billiion profit.
- 3 billion in profit * 20% GP return * 0.5% carry = $3.0 million.
Note that this is just an approximation and the $3.0 million will be paid out over the life of the fund, which can be 10+ years.
An observation on deal and firm size as it relates to compensation via carry.
Once you account for debt, fees, preferred return, the 0.5% won't get you as far as everyone thinks, but that's why 3x return on invested capital at a megafund where you're selling businesses for hundreds of millions to billions vs. a middle market fund where you're selling for hundreds of millions at best, makes a big difference in compensation as it relates to carry.
Carried Interest Private Equity Example
This post has been formatted. This was originally posted by certified user @PEguy2011, a private equity partner.
Suppose a business is purchased for 50 million. The purchase was funded with 30 million in equity and 20 million in debt. After a period of time the debt is written down to 10 million. The business is then sold for 150 million.
What would a .5% carry look like on this deal?
- Paying off debt
- 150mm - 10mm debt = 140mm
- Transaction fees
- 140mm - 5mm in fees = 135mm
- Payback equity and Preferred Return for initial investment
- 135mm - 30mm to payback equity = 105mm
- 105mm - 5mm for preferred return = 100mm
- Carry pool. Assuming 80/20 split
- 100mm - 80mm to limited partners pool = 20mm
- Your carry
- 20mm * .05 (.5% carry) = 100k
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