Private Equity - Carried Interest?

CompBanker:

Also, another thing to keep in mind. While the limited partners may be entitled to an 8% preferred return (the hurdle), there is usually a "catch-up provision" that enables the general partners to receive 100% of the profits above the 8% hurdle rate until an 80/20 profit sharing split is achieved. After that, every dollar going forward is split on an 80/20 basis.

Ohh, I understand now. Wow, thanks.

PEguy2011:

The math is pretty basic actually. The way the waterfall works on a theoretical FUND level...

Let's say we manage $1 billion and i get 0.5% carried interest. That essentially means my interest in the fund is $1,000,000,000 x 20%carryx 0.5% my share of thecarry= $1 million. The way it would get paid out is if the fund as a whole returned 3x on invested capital, i would get 2x mycarryvalue or $2 million. Basically, 1x is to pay back the investor my share of thecarry, and then i get the rest which is 2x.

That said, the way the waterfall works in ACTUALITY since most funds go on a deal by deal basis (you don't need to wait for the entire fund to be paid back before collecting yourcarry):

Let's say we purchase a business for $50 million of which $20 million is funded with debt. Then 3 years later, let's say we've amortized the debt down by $10mm and we sell the business for $150 million. Also, assume we haven't put any more equity in, nor taken any distributions. At this point, capital structure is $30mm equity, $10mm debt and we just sold the business for $150mm. The $150mm is used to pay the debt first, so proceeds are down to $140mm. Then we pay transaction fees/deal fees, so it's down to $135mm. Then we pay back the $30mm equity + preferred return to LPs, so we're down to $100mm. Finally, it's time for thecarryto kick in. So the $100mm gets split 20/80 or $20mm tocarrypool, $80mm to LPs. Of the $20mm, now i get my piece of the pie which is 0.5% or $100k.

一旦您收取债务，费用，首选收益，0.5％的收益就不会像每个人所想的那样让您能带来，但这就是为什么在Megafund上3倍投资资本回报率，在那里您要出售数亿至10亿至数十亿美元的企业。a middle market fund where you're selling for hundreds of millions at best, makes a big difference in compensation as it relates tocarry.

However, most megafunds don't underwrite to 3x return because it's so difficult to generate returns like that when you're paying half a billion to billions of dollars for businesses... whereas most middle marketPEshops will underwrite and expect a 3x return minimum on their investments. So there is somewhat of a balance between the two.

If you go on a deal by deal basis, you are likely to have pretty stringent clawback clauses though.

when looking at the fund level - wouldn't management fees have to be sub'd out from the profit pool? or does that depend on LPAs?

How can this be urgent when you're asking for carry comp across the board. Do you have exploding offers at every level?

Doing research for an MD at my firm. Didn't care to tell me why he needs it:)

Because he's looking to jump ship. Depends, firm by firm, obviously.

This is actually an interesting topic where there's not much publicly-available data. Like GameTheory said, it depends firm by firm - largely becuase of size of fund and number of people. A lot more mouths to feed at the big shops but small carry % goes a long way when based on billions.

But what do you think the typical breakout is like per aggregate level? 70% partner level, 15% principal, 10% VP, 5% Senior Associate? Just a swag. What do you guys think(know)?

According toBlackstone'ss1their Senior MD's were paid about 7% of the total carry in 2006.

Works out to about .13% with 57 SMD's. Curious if this is similar to other largePE资金。

I haven't taken the time to check thats1，但这没什么意义 - 其他93％的去向？

to Steve and Peter

that's not right. You're misreading thes1.

I might be misreading it. Analysis was from Bankers Ball:

http://www.bankersball.com/2007/03/26/Blackstone-filing-details-on-comp/

在分析的第二部分中，“将计划参与到我们的SMD为160,000,000美元。

Divided 160,000,000 by the 2 billion in Carry Dollars Created = about 7%. Where am I going wrong? Is Carry Plan Participations not equivalent to the amount of carry the SMD's recieved in comp?

Hah Steve wishes!

I can't get into the specifics because it's sensitive info but if you wanted to get a better view read through the compensation section. To highlight some key parts are:

Footnote to $160: "We expect to make aggregate annual performance compensation payments to the senior managing directors that work in each of our businesses that range from30% to 40%of the revenues of the relevant business."

Definition: carry Dollars Created is calculated by multiplying the aggregate amount of Limited Partner capital invested by the carry funds in transactions during a given period by the contractual percentage (generally 20%) of the profits that we earn as a preferred allocation of income (a carried interest) from these investments,假设we achieve specified cumulative investment returns.

Thanks Ivey.

So 30% to 40% of the revenues, ie 30 to 40 % of the 20% return, would be about 7% of the total fund's size, if I'm reading correctly.

IE ifBXhas a 100MM fund, with a 20% return, after y1 the SMD's are paid 8.4MM, or 7% of 120M, on average.

Correct?

Moony, you're confusing the "carry" and "fund size." In your hypothetical 100mm fund, 20mm (assumingIRRhurdles are passed) is the excess so the carry is 20% of the 20mm, and 30-40% of the carry would belong to the senior partners. Nobody really looks at carry as % of fund size, though.

应该注意的是，上面的退出只提到GP来自LP承诺。GP共同投资没有提及，虽然我个人尚未浏览s-1I doubt GP co-invest has to be publicly reported and is housed under a separate LLC, anyways. So it'd be very difficult to know exactly how much per investment partners are really earning.

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Game is on the ball.

Just FYI the GP co-investment is 1:1 with the common units if funded off thebalance sheet(it is distributed pro-rata to all unit holders) and you'll see that listed as "other investment income" in the earnings report.

If funded by the professionals then you receive returns like an LP with a simliar waterfall. (modified slightly)

Won't get into specifics on how that breaks out since it's non public information, but the mostPE可以说，合作伙伴有义务将大部分净财富保留在基金中，以使他们真正努力提高回报。

GP co-invest has higher returns than LP returns. You're getting grossIRR，不是网。