Date
22 July 2017
The management of a fund usually earns a 20 percent carry interest. Different partners bring in various kinds of value, but in most cases, the carry pool is equally distributed. Photo: Xinhua
The management of a fund usually earns a 20 percent carry interest. Different partners bring in various kinds of value, but in most cases, the carry pool is equally distributed. Photo: Xinhua

Tips for starting a private equity fund

A fund will usually have several founding partners. The key is how to effectively allocate the carry interest.

Generally speaking, the management of a fund will earn a 20 percent carry interest. Different partners bring in various kinds of value, but in most cases, the carry pool is equally distributed.

If a team has four founding partners, each one can get 25 percent of the carry interest.

Later, when the team grows bigger, the founding partners will have to leave a part of their share for distribution to the new partners and staff.

Usually, the managing GP will hold 45 percent of the carry, the senior partners will hold 30 percent, and mid-level partners will have 10 percent. The rest is for other staff and junior partners, but not the low-level analysts and associates.

Sometimes, in order to attract investors, a part of the carry interest may be shared with them.

This distribution model is only for reference. The most important thing to remember is that the founding partner should give new members a share of the carry interest that they deserve.

In the private equity fund industry, some distribute the carry on a deal-by-deal basis. Those who work for the project share in the profit.

This model may seem fair to everybody, but it also makes everyone focus on their own project. It doesn’t build cooperation among the different teams.

Such a model may not be good for a new venture capital with limited resources.

Sometimes, the fund will hire strategic consultants or venture partners. Usually, these people are not full-time staff of the fund, but only provide due diligence services or consultancy for specific projects.

Private equity funds may also share some of the carry interest with them. In this case, a deal-by-deal model may be more suitable.

This article appeared in the Hong Kong Economic Journal on Jan. 7.

Translation by Myssie You

[Chinese version 中文版]

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MY/DY/CG

Director at Spring Capital

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