Carried Interest: How Much You Put In = How Much You Get Out
Let’s level-set before we begin: Carried interest percentages for individual investment professionals are calculated as a share of the total GP carry pool. The pool is what determines how much carry each individual receives.
The pool is traditionally an 80/20 split, where the LP receives 80% of fund profits and the remaining 20% goes into the GP carry pool (which is what the majority of firms have, according to our survey data). Since the total GP carry pool determines the overall pot that individual carry distributions represent a share of, the size of that pool matters a lot in determining the actual carry an investment professional receives.
For example, a 50% share in a carry pool where the GP gets 10% of fund profits overall is equivalent to a 25% share of a carry pool with a traditional 80-20 split.
We looked at how vesting times, AUM and the overall percentage of committed capital that the GP has to commit affect the overall size of a firm’s carry pool to see which of these factors makes the most difference.
The takeaway? Perhaps, unsurprisingly, we found that:
- While all three affect pool size somewhat, the most consistent indicator was total percentage of committed capital
- The size of the GP commitment correlates most closely with the overall size of the carry pool
- Larger commitments translate into higher percentages of total carry for the firm more reliably than longer vesting times or higher AUMs
How much you put in is what determines how much you get out. Much like life in general!
Which is exactly WHY we encourage you to participate in the compensation survey today. The more data you give, the more data you get back, and the more robust the dataset gets for everyone to make educated compensation decisions on their cash and carry.