GPs see ‘reserve carry’ as incentive tool

More private equity firms are thinking about how unallocated carry profit shares can be used to retain junior dealmakers.  

A growing number of private equity firms are using side pots of unallocated carried interest shares to reward junior outperformers, especially those who mature and take on more significant roles during the life of a fund 

GPs typically save a portion of the firm’s carry profit share, known as “reserve carry” in industry parlance, to incentivize staff and allocate carried interest rights to new dealmakers who join after a fund has launched.

“A GP may allocate a significant percentage of the carried interest on the closing of a new fund, but retain a percentage to allocate to dealmakers who outperform throughout the lifecycle of the fund,” said John Gripton, a managing director and head of investment management at private equity fund of funds Capital Dynamics.

The use of reserve carry today is much more “formulaic”, adds Marco Masotti, co-chair of law firm Paul Weiss’ private funds group. “GPs are increasingly looking for ways to incentivize younger professionals to remain put, and are holding more conversations about how unallocated carry can be used to accomplish that.”

Reserving carry can also be a way to find favor with investors, said Kirkland & Ellis private funds partner Andrew Wright. “LPs want to know that a sponsor has the appropriate tools to incentivize and retain key players in the team, and setting aside some ‘jump ball’ carry for discretionary allocation down the road can be one of those.”  

For more on how GPs are incentivizing junior staff, including further discussion on how carry can be used as a tool in that aim, see the November edition of PE Manager.