When is carried interest paid?
Is it paid when the Fund and ALL of its portfolio companies are realized (i.e. once every 5 - 7 years)?
Or can it be distributed once the LPs receive their inititial investment back. For example, in Year 2 a portfolio company is sold; the proceeds from the sale are equal to the LPs initial investment + 8%. Going forward, can the carry be distributed (assume 80/20) each time the remaining portfolio companies are liquidated (i.e. 60 days after the transaction, annually, etc.)
The carry is paid as investments are realized. If we held our LP's money hostage like that for an additional few years, their net IRR would go down.
So I assume the GP (Partners, Principles, VPs, etc.) is also paid its carrry once the investments are realized, or is it usually held until year end and distributed as a bonus?
Most funds only pay out as investments are realized. Other funds, especially open ended funds, will pay out carry on "xxx" basis (quarterly, yearly, biannually, however they set it up), based on a predetermined methodology. I have worked on funds that paid out quarterly based on a DCF of the current cash flows at the base rate, so if its a 20/10 fund, you run a DCF at 10% to determine current under/overperformance and value. These type of funds will usually have some sort of clawback for under performance when distributions have been paid.
The long and the short of it, it depends on the fund and how it was setup.
PowerMonkey hit it on the nose. It depends on the documents.
I've been seeing the "pay quarterly"/GP clawback option used in most of the funds that I've been working on recently.
Right now this is a job. If I advance any higher in this company, then this would be my career. And um... Well, if this were my career, I'd have to throw myself in front of a train.
Interesting, PowerMonkey, this is news to me. I guess I was answering on personal experience with just one fund and using blanket assumptions - a dangerous proposition, I know. What big funds are using the quarterly/yearly/biannual payouts? Merkhet and PowerMonkey - you both use the phrase "work on" funds...are you guys working at fund of funds?
I'm an attorney at a law firm that does a lot of fund formation work. That's where my experience/knowledge comes from.
-------- Right now this is a job. If I advance any higher in this company, then this would be my career. And um... Well, if this were my career, I'd have to throw myself in front of a train.
I'll be tread carefully here as to not create another blanket assumption. At my firm, GP co-invest is paid out in dividends at the same time it is distributed to the LPs. Even the assistants get a peice (if they put in some money or negotiated it beforehand - not a bad deal).
GameTheory,
Are you implying that assistants can invest in a particular portfolio company on a one-off basis or are they awarded a % of the carry in their employment contract?
Also, I thought once a fund is closed; no more money goes into it, i.e. no one-off investments are even possible.
Sorry about all the questions; just trying to get my arms around it.
I currently work in a infrastructure PE shop. So, my experience has been with the raising of internal funds, and the comping of our offerings to others in the market. I have also had some experience with FoFs in my shop as well.
True carry, that paid to GP coinvestors and not associates etc receiving "phantom carry," can be paid out either as the deal happens, or in the normal quarterly distributions. This would depend on the mechanisms from when the fund is setup. Funds with over and underperformance mechanisms would be more likely to pay out at the end of a quarter vs a fund like GameTheory has discussed.
Remember, in practice these things are never the way they sound. there are usually a dozen pieces of paperwork that are involved to actually get paid, finding this out is one of those joys reserved for smaller funds.
Anyone who works at a PE shop can be awarded carry in their contract or terms of employment. Also, when new funds are being raised they are often given the opportunity to coinvest.
Funds are continually raised at most places, so you might not be in BobDole I, but you get an opportunity to co-invest in BobDole II when it is raised. When you are granted carry in a contract, they are just assigning some of the larger pool of total carry to you.
Rerum ut consequatur exercitationem voluptatem. Aliquid quaerat ut quo non. Aut similique sit omnis et minima repellendus asperiores. Quo laudantium beatae et sed ipsa voluptatum. Porro ut qui nihil qui officia beatae corporis. Aut nihil et explicabo necessitatibus laudantium possimus.
Voluptates repellat quae non beatae voluptate similique velit. Cumque alias ea est et voluptas. Quidem id repellat excepturi quo a.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...