Carried interest being ‘tweaked’

Carried interest is being awarded further down the food chain.

“When I first started recording compensation data, you had to be a partner to earn carried interest,” says Mike Holt, founder and managing director of Holt Private Equity Consultants, who has been tracking private equity compensation trends since 1980 and producing an annual report since 2002. Holt is the author of one of two private equity and venture capital compensation reports, covering North America and the UK/Europe, respectively, published by Holt Private Equity Consultants, MM&K and PEI Media.

While increasing the base salary and bonus packages on offer can certainly attract new hires and help retain old ones, firms are increasingly distributing carried interest more widely throughout the firm. “More carry is being awarded further down,” says Nigel Mills, director at MM&K and author of the report for Europe and the UK. “Relatively speaking, there is less carry being awarded to partners. It’s a tweaking but it’s not a fundamental shift.”

Carried interest, in addition to providing an incentive for employees, has the added benefit of enabling firms to ‘lock in’ executives, according to Tom Thackeray, a principal at executive search firm Heidrick & Struggles’ private equity practice. The nature of carry as a long-term commitment discourages staff from jumping ship.

In 2019, 30 percent of North American firms and 37.5 percent of UK and European firms allocated carry to non-partner administrative/support staff.

However, despite an overall trend in the direction of more equal carry distribution, the median carried interest allocation for partners was still significantly higher than that for non-partners. Last year in Europe and the UK, an average of 66 percent of a fund’s total carry was allocated to partners and managing directors, and 26 percent was distributed among non-partners.