Private equiteers live for the carry (carried interest). We get overly qualified at college, we leave our own profitable ventures, we accept meagre salaries, we work our glutes off trying to close deals… all for the carry. Some equiteers (admittedly lower in the hierarchy), do it for the potential… of potential carry (that is, they’re not yet signed up to carry, but one day hope to be).

However, it’s important to look at carry with a clear mind, one not too blinkered by riches. Moreover, in writing this post, I’m hoping that some of you aspiring private equiteers will enter the industry with carry at the bottom of the priority list. If you can do this, then you’ll be able to self-motivate even if your fund explodes and there’s no carry to go around.

Let’s look at a very simple example. Your firm runs a $100m fund with a 20% carry entitlement. There are four founding executives and eight investment executives. It’s likely that, let’s say, 25% of the carry is taken up by anchor investors, parent companies, previous founders/partners, etc. (Yes, when you leave a fund, often you are still entitled to accumulated carry on that fund.)

The founders will take a large part of the remaining 75%, a very large part, and may leave the other eight executives with say 20%. As a newer member of the investment team, your entitlement is lower, so let’s say 1.5%. However, you don’t earn that 1.5% upon joining the team though; it will likely be broken up so you earn 0.15% per year for 10 years.

Now let’s say your fund has a 2% management fee. But, management fees are usually based on committed capital, which reduces as money is distributed back to investors. So, let’s say $15m in fees. That’s about $85m invested. If your team manages to double the investment (which isn’t unreasonable in the right environment), total carry will be $17m. In your first year that you earn 0.15%, that equals about $25k of carry.

If all goes well and you stay with the fund for 10 years, your total carry will be $250k. For simplicity, if you get that in five equal repayments in the last five years of the fund and you use a discount rate of 15%, the PV of your carry is only about $50k. To be a little less conservative, add the nominal amount of $25k to your current salary of say $100k (this is PE remember), and your annual earnings, including carry, are $125k. This is a fairly typical scenario. Sure your fund could return 4x cash and you could have 10% of the carry, but these are extremes.

So, I’m not trying to dissuade new private equiteers, but rather put carry into context. My advice is that you make sure you’re in private equity for the right reasons: you like to do deals, deal with business owners, research different industries, etc. The money will follow if you have the passion for those things, but you’ll be sorely disappointed if you’re only entering for the carry. It still takes 10-15 years to run your own fund and make the real money, especially in mid-market.

Or, with the right background (started and sold a successful business, Ivy League MBA with summa or magna, etc), you may get a foothold into a large fund and become entitled to a smaller piece of a much bigger apple pie.