Vice President Fund Carry/Equity

Hey All-

I have been negotiating an offer with a PE firm to come on as a VP. I actually have worked for this same firm before, left for a few years, and now they have roped me back in. They are currently in the process of raising their second fund (sub $500mm target) and since it is still small, my comp is likely at the low end of the PE VP spectrum.

Question I have to you is, do VPs typically receive carried interest in the firm and if so how much? Given the high level of risk around the fundraising, I would think this could be something I can push for to make up for the slightly lower than average salary.

Thanks!

VP Private Equity

Certified user @TheBigBambino weighs in on carry in a private equity firm at the vice president level.

Yes - virtually all VPs have carry. Typically if you took the carry and split into a 100 point scale you will get 1% - 2%. It is possible it vests as well (i.e. - over 5 years for instance)

Given your fund size, you may even be able to ask for more then that, especially if there aren't many VP/Principals/MDs already there.

In all seriousness, I would be extremely hesitant of working at a firm that doesn't include it's VPs carry participation.

One way to figure out how much to ask for is doing a method one of the users above did by allocating a annual dollar amount.

For example, at a $1B fund, a VP should expect about $750k - $1.25M in annualized compensation based on fund performance. For example
Based + bonus $375k
Fund size: $1B
2x return
Total Fund carry = $200M
VP Carry participation = 1.5%
VP Carry payout $3M
Average hold period: 5 years
Annualized Carry Payout = $600k
Annualized total compensation - $975k

Given the number of variables above, I've see people do the calculation a number of ways. I choose a 5 year period as that's the active average hold period of a deal and a decent firm should raise a new fund at least every 5 years.

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Comments (27)

Apr 4, 2016

Yes, VP's typically receive carry. There is a Glocap report that indicates 95% of post-MBA level professionals receive it. The range varies widely - anywhere from $300K-$400K carry dollars at work, all the way up to $1.5mm carry dollars at work for a brand new post-MBA professional (some firms call this senior associate, some call it VP) at a "small PE firm" (which Glocap classifies as $0 to $750MM AUM). The variance is due to a number of factors, including size of fund, number of professionals at the fund, location, precedent, generosity of the partners, etc. Given you were already at the fund, I would expect you to have some success negotiating this point. They know your work product vs. taking a risk on a brand new hire. Most firms will pay up for that.

    • 4
Apr 4, 2016

Do you have a link to the report?

Apr 4, 2016

Unfortunately I don't. They publish it each year and it costs like $3,000. It is available in many university libraries or career centers though.

Apr 4, 2016

Yes, VPs typically have carried interest. Sub-$500mm fund is a big category as there is a significant difference between a $125mm fund and a $475mm fund, but I think carry in the 2% - 4% range would be ~market.

What is your salary / expected bonus?

"Well, you can do whatever you want to us, but we're not going to sit here and listen to you badmouth the United States of America."

    • 2
Apr 4, 2016

@Eric Stratton don't want to get into specifics but base is in the 125-150k range, bonus expected to be 75-100%+ depending on the success of fundraising. For the record, no MBA but strong business undergrad.

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Apr 5, 2016

wow, with that base and salary, you better get carry. otherwise, why even join?

Best Response
Apr 4, 2016

Yes - virtually all VPs have carry. Typically if you took the carry and split into a 100 point scale you will get 1% - 2%. It is possible it vests as well (i.e. - over 5 years for instance)

Given your fund size, you may even be able to ask for more then that, especially if there aren't many VP/Principals/MDs already there.

In all seriousness, I would be extremely hesitant of working at a firm that doesn't include it's VPs carry participation.

One way to figure out how much to ask for is doing a method one of the users above did by allocating a annual dollar amount.

For example, at a $1B fund, a VP should expect about $750k - $1.25M in annualized compensation based on fund performance. For example
Based + bonus $375k
Fund size: $1B
2x return
Total Fund carry = $200M
VP Carry participation = 1.5%
VP Carry payout $3M
Average hold period: 5 years
Annualized Carry Payout = $600k
Annualized total compensation - $975k

Given the number of variables above, I've see people do the calculation a number of ways. I choose a 5 year period as that's the active average hold period of a deal and a decent firm should raise a new fund at least every 5 years.

    • 10
    • 1
Apr 5, 2016

+SB.

Apr 4, 2016

Just to add to your post:

On vesting, great point - I have never seen or heard of a carry award that does not include a vesting schedule. Vesting can vary widely, anything from 5 years straight line, to 6 year cliff (you get nothing if you leave before 6 years), to weird 0/0/25/15/15/15/15/15 structures and the like.

On translating the carry award into an annual number, I think most people look at it as at least a 7-8 year timeline. Typically, you have 5 years to invest the capital and 5 years to harvest. If you assume a 5 year hold, you are not getting your first carry check until 5 years after the fund begins investing. The rest of the checks would likely roll in over the following 5 years.... so on average 7-8 years. I typically take a more conservative approach and spread the carry over 10 years. Moreover, I think a 2x return is an appropriate assumption. I know some people look at 2.5x, but, again, I prefer to be conservative on how I look at this.

    • 3
Apr 4, 2016

Agree with everything you have said. 7-8 years might be more appropriate and is conservative and logical.

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Apr 5, 2016

Heidrick & Struggles 2015 North American Investment Executive Compensation Survey

See slide #10:

http://www.heidrick.com/~/media/Publications%20and...

Apr 4, 2016
oldrow:

Heidrick & Struggles 2015 North American Investment Executive Compensation Survey

See slide #10:http://www.heidrick.com/~/media/Publications%20and...

Very helpful, thank you.

Apr 6, 2016

Is there an explanation for why real estate private equity groups tend to pay less than vanilla pe groups?

Apr 6, 2016

Real estate is the Vanilla P.E. Deals are all the same, and they are easy and replicable. Thus, in high supply. (Not to mention boring.) Most of all it is safe. Less risk, less reward.

Apr 6, 2016

Perhaps you're right in the sense that most real estate investment strategies are focused on core and/or lower-risk value-add strategies.

But opportunistic real estate investing is on the far end of the risk spectrum, can be extremely complex and, in most cases, needs to be unique and creative in order to be successful.

Apr 6, 2016

I guess because RE PE has typically lower returns than plain vanilla private equity. Real Estate is oftentimes less risky and less complex than vanilla corporate PE

Apr 6, 2016

For REPE Value Added I think that deals would be more complex. Do they have same compensation than any other Real Estate Private Equity?

Apr 7, 2016

The investments that value added funds make may be more "hands on" but I'm not sure that makes them more complex (at least not from a structural or legal perspective).

In any case, in Asset Management, you're not really rewarded for doing work that is more complex or hands on - you are rewarded for two things:

  1. Managing more capital
  2. Making more money off the capital you manage

For example, a special sits PE firm that is heavily involved operationally doesn't get to charge more than a more vanilla PE firm that is hands off. It may be that they generate higher returns because of their more-involved efforts (similar to how a value added firm ought to return higher than a core fund because they have to lease up buildings or otherwise improve non-prime assets) which may in turn create higher pay, but that doesn't mean that they charge more just for doing more.

Apr 7, 2016

You can't assume that fund makes 2x in 10 years and still gets carry because hurdle rate would not be cleared with those numbers. @ 2.5x i think you barely clear hurdle. I would assume a multiple that's equivalent to 9% p.a. over 10 years.

    • 1
Apr 4, 2016

The hurdle doesn't accrue on the entire fund starting day one. It accrues only on called capital. You aren't getting dinged for the hurdle on the entire fund from day one because LP's don't have to put money in until you call it to make an investment.

    • 1
Apr 7, 2016

I understand that. But the point is those are parameters that you don't know / control. So in calculating carry value and consequently your net worth, best to just stay conservative. I think the dollar value at work method is highly subjective and can be pretty misleading.

  • Anonymous Monkey
  •  Apr 18, 2016

2x is a pretty optimistic return in today's market. Top quartile returns were 1.7-1.9x for 2007-2008 vintage funds.

Don't be fooled by "average" carry in compensation surveys. The median is much lower.