Sizing deal-by-deal carry vs fund level
For the people working at funds that do deal by deal carry - how does this compare (in size) vs other funds where the carry is at fund level? In principal, getting to the same $ as for a fund-level carry you'd need to receive materially higher bps. Are there any references (ideally also against fund or typical deal size)?
I think (someone correct me if I'm wrong) - that in the majority of scenarios, fund-level carry is better. I don't think the bps matter assuming they are the same - it all has to do with the timing of vesting.
Let's use an example. A $1bn fund and a VP who is allocated 100 bps of the carry pool. That would imply $2mm carry-dollars-at-work ($1bn x 20% x 1%). Now let's consider what happens in (A) deal-by-deal carry, and (B) fund-level vesting. Assume in both cases that it is a straight-line 5-year vesting schedule - except one works on a deal by deal basis and the other works on a fund-level basis.
The answer becomes obvious when you think about what happens at the end of Year 5.
For Scenario (B) - Fund-level vesting - the VP will be 100% vested in the entire fund (all $1bn of equity).
For Scenario (A) - Deal-by-deal vesting - the VP will be 100% vested in deals done/equity deployed in year-1, 80% vested in deals done in year 2, 60% vested in deals done in year 3, etc. On average, at the end of year-5, the VP will therefore only have ~60% vested on an apples to apples basis compared with Scenario (B).
The only scenario where deal-by-deal might be advantageous is if the fund is aggressive with deployment upfront, and monetizes very quickly (in which case it usually becomes 100% vested). On average, fund-level investing should be more advantageous (if anything, deal-level carry should have higher bps to offset what I described above).
There's a classic hedge fund recruiting question - would you prefer a basket of options or an option on a basket?
The answer is the former (absent specific initial conditions) and that's what deal-by-deal carry represents.
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All true, but there are disadvantages to fund-level carry as well. Setting aside the fact that the overall pie is mathematically smaller (for the same hurdle & fee %), the lion's share of the points get handed out shortly after closing the raise, so if your firm raises every 5 years your economics lag your current job title by 2.5 years on average...
If you back yourself politically and can ally yourself to the partner with the 'hot hand' in a momentum sector, you have a chance to get massively overcompensated with deal-by-deal.
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I think this is a good way to look at it, but maybe has the wrong assumption that you're still investing in every deal. At least at my firm, deal by deal carry implies that you only receive carry in the deals that you work on. I'm not sure what that means for the %s that are allocated since carry is only allocated to VPs and up, so I'm curious to hear other people's experiences at different funds.
Deal by deal is advantageous if you think you're a much better investor than others at your firm. Some GPs like deal by deal because they think it provides a better incentive for individual performance than the team-oriented fund-level carry.
There are also the hybrid structures where you get carry based on your vertical - for example, you only do business services deals within a fund that also has health care and industrials verticals.
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