From great to small, firms allocate lion’s share of carry to partners

You can’t blame small private equity shops for paying less in salary and bonus than the big ones. They simply don’t bring in the same level of management and portfolio-company fees. They can’t support comparable payrolls.

So they make up for it by being more generous when it comes to allocating carried interest, right? Well, not so much, according to the 2019 Carried Interest and Compensation Survey, now in its 12th edition and published by PE Professional.

To be sure, compensation practices vary from firm to firm and even junior professionals can get a modest allocation of carried interest at some firms. But broadly speaking the data suggests that the industry tends to be fairly consistent in how it allocates carry to people at different levels in the organization.

Private equity firms whose latest fund is less than $100 million in size allocate, on a weighted-average basis, 73 percent of carry to partners, 22 percent to top professionals, 5 percent to middle professionals and none to entry-level professionals or administrative staff. For firms with funds of $100 million to $250 million in size the comparable figures are 83 percent to partners, 12 percent to top professionals, 5 percent to middle professionals, and none to the rest.

The study, with 300 participating funds, mainly located in the United States and Canada, defines top professionals to include senior VPs and principals; middle professionals to include VPs and associates; and entry-level professionals to include AVPs and analysts.

The distribution patterns are fairly similar for the larger shops. Private equity firms whose latest fund is $750 million to $1 billion in size allocate 73 percent of carry to partners, 19 percent to top professionals, 8 percent to middle professionals and none to others. Those whose latest fund is larger than $1 billion allocate 81 percent to partners, 13 percent to top professionals, 6 percent to middle professionals and none to others.

But those are weighted averages, and they shouldn’t discourage you from trying to negotiate carry into your pay package. Nearly one in five (18 percent) firms whose latest fund is less than $100 million in size reported allocating at least some carried interest to entry-level professionals. The category with the highest percent of entry-level employees entitled to carry?

That would be firms whose last fund was $500 million to $750 million in size. Nearly a third (31 percent) of firms in that category reported allocating at least some carried interest to entry-level employees.

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