Carried Interest Participant Allocation Plans: The Current State of the Market and Controls for Managing Carried Interest Data

By Ryan Burger, PFA Solutions

Private Equity and other Private Capital firms - including Private Debt, Venture Capital, Real Estate, Infrastructure, and Hedge Funds - are turning their attention to the compensation function to enhance controls and efficiencies using software solutions. In recent years these organisations have been optimising their internal operations by making better use of technology by implementing new solutions. However, until recently, most firms did not automate processes within the compensation function, as the majority focused on other areas requiring improved use of systems as a priority, including fund accounting, corporate accounting, portfolio monitoring, and investor relations. There is now a growing trend to leverage software platforms and service providers to reduce the reliance on spreadsheets and improve controls and reporting. Many firms are now deploying software which is resulting in a richer experience for employees (i.e., statements and dashboards), mitigation of risks in calculation mistakes, as well as creating the ability to generate firm level analytics on compensation (including diversity and gender pay gap analyses).

The compensation function involves the management of highly sensitive data (as with most organisations) and calculations and reporting can be prone to user error given the reliance on spreadsheets. In private markets, the compensation function includes management of staff members’ wages, bonuses, equity in the management company, carried interest allocations, retirement contributions, and other compensation arrangements

One such compensation arrangement that often includes many interdependencies and is a major element of private capital compensation is carried interest. Carried interest, or ‘carry plans’, are opportunities for employees and partners to share in the financial success of a private equity firm’s profits, often acting as incentive and aligning employees, partners, and affiliates with the firm’s success. These carry plans dictate the proportion of profits that individuals or entities will receive upon successful investing and often have stipulations based on seniority, role, tenure, and many other factors.

This article provides an overview of various types of carry plans and complexities, including current industry trends and best practices to help manage this sensitive and essential data.

Current State of the Market

Many firms maintain strict control over their compensation processes by limiting the number of individuals with access to highly confidential carry and compensation data. As more funds are launched within a firm, and partners and employees join and leave, the operational activities and data management efforts begin to increase significantly.

Most organisations rely on spreadsheet models to handle carry and compensation arrangements to track and report on all employee, partner, and affiliates’ share of past and future carried interest and other compensation arrangements. These models track employee carried interest allocations, including former employee awards, vesting schedules, past distribution data, and future forecasts. Effective management of this data is critical, so the calculation remains correct and partner/employee compensation is not miscalculated.

In addition to common key person dependencies and increased complexities, additional internal compensation reporting needs are evolving, paralleling overall industry advancements, such as improved investment/portfolio company analytics and transparency to external investors (i.e., limited partners). Thus, firms are increasingly seeking ways to aggregate compensation data across the enterprise, to view and report on salary details, bonuses, retirement contributions, carried interest awards, management company income, and equity investments by partners/employees—all in a single view. Firms are also using this data for year-end budgeting, forecasting, and fairness of pay initiatives, such as diversity and gender pay gap analyses.

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