I focus on Carry, which is the performance related pay. This is cash sent to PE fund partners and taxed at a low rate (capital gain tax rate). The question is: how much went in as Carry during the year 2020?
The issue is: the carry paid is kept secret, for no good reasons whatsoever.
However, it is relatively easy to obtain a precise enough estimate for each vintage of funds, and this is what I did in my prior work, but it is not too difficult to say how much was paid in a given year.
I use Burgiss data to do that specific calculation:
Select all PE funds focusing on North America raised in 2015 or earlier:
4,346 funds, 2864bn ‘cap’, DPI of 1.20 and 1.57 TVPI as of Dec 2019
4,346 funds, 2864bn ‘cap’, DPI of 1.26 and 1.63 TVPI as of Dec 2020
Among these, funds that are in the money (IRR>8% net):
2,559 funds, 1891bn ‘cap’, DPI of 1.38 and 1.83 TVPI as of Dec 2019
2,519 funds, 1825bn ‘cap’, DPI of 1.49 and 1.95 TVPI as of Dec 2020
This calculation assumes that NAV is an accurate estimate of future cash flows, and therefore includes future carry due – this assumption is in line with findings in Jenkinson et al. (2020) who show that NAVs on aggregate are indeed in line with future cash flows observed, net of all fees.
Other assumptions:
i) The ‘cap’ in Burgiss is equal to total capital called (should be close!). I ignore non mature funds and therefore slightly under-estimate the carry paid and due!
ii) Carry assumed to be 20% with 8% IRR hurdle and European style (hence someone who has been above 8% and now is below has not earned any carry), which means that there as well I underestimate carry.
iii) I ignore catch up clauses, whereas in practice it is about 80% and therefore funds with IRR between 8% and 11% do not earn full carry unlike what I assume here. However, few funds fall in this category and such an adjustment does not affect results much, but it makes calculations a lot heavier and less transparent/simple.
iv) I ignore carry paid to intermediaries such as consultants and fund of funds
Next, calculate total carry due (realized and latent) as of the two dates:
As of Dec 2019: 0.25*cap*0.83=392bn
As of Dec 2020: 0.25*cap*0.95=449bn
Delta is therefore $57bn
How many people earn a carry in the US?
We can do it per fund easily: $23mn per fund. Each fund may have two people as prime carry earners on average, thus about $10mn a person. But discrepancy across funds is huge, so while many people probably got $1mn or so for the year, a few will have received over $100mn. I can only compute an aggregate number.
Also note that many other fees are charged by PE funds. We do not know the cost base of the funds, and can therefore not compute how much comes from this other source of income, but it is certainly not negligible. As far as Carry is concerned, it is quite safe to estimate that about $60bn was accrued. Who pays this amount? Mainly pension funds and university endowments, plus all the intermediaries that channel money from family offices and smaller institutional investors (that’s the fund-of-funds and the like).
