The Definitive Guide to Carry and Compensation Management
Empowers professionals in the private capital space to make informed decisions that keep teams incentivized.
Executive Summary
Carried interest and compensation are at the heart of private capital and are the primary reward when a firm’s partners have succeeded in deploying their investors’ capital wisely. Yet calculating, managing, and forecasting carry and compensation functions accurately and efficiently are among private capital firms’ most complicated challenges.
In the context of this guide, carried interest can refer to “true carry” as well as synthetic carry (also referred to as Phantom, LTIPSs, and bonus pools). The primary difference between true and synthetic is the tax treatment.
Today, the dizzying complexity of carry and compensation plans necessitates automation, new technologies, savvier professional services, and a host of other solutions. PFA Solutions’ Definitive Guide to Carry and Compensation Management explains the intricate world of carried interest participant allocation plans within private capital firms.
Part I
Part I of the Guide outlines the current landscape in carry and compensation today, listing different carry plan models, vesting intricacies, document management, and the broader context of reporting and distributions.
Part II
Part II sheds light on the escalating complexity and challenges that professionals face in carry and compensation today, including tax complexities, co-investments, and the nuanced handling of hurdles and catch-ups.
Part III
In Part III, the guide demonstrates how technology is a pivotal differentiator in carry management that addresses the evolving priorities of CFOs and Heads of Finance.
Part IV
Part IV outlines strategies for enhancing controls in carry management, advocating for optimized operations, secure data management, and easy participant access.
Part V
In Part V, the focus shifts to private fund data and analytics, underscoring the best industry practices for implementing carry management solutions.
Part VI
Part VI guides private capital firms on essential questions to ask prospective carry management partners, ensuring a comprehensive understanding of how solutions can navigate complexities, improve controls, enhance security, attract talent, and streamline operations.
The Definitive Guide to Carry and Compensation Management empowers professionals in the private capital space to make informed decisions that keep teams incentivized.
Table of Contents
- What private capital firms should ask their prospective carry management partners
- Can the solution cut through the complexities of your firm’s plans?
- Does the solution offer one source of truth for GPs, employees, investors, and others?
- Can it produce total reward statements?
- How will the solution improve controls and security?
- Why will the solution help recruit and retain top talent?
- Will it increase efficiency and reduce downtime spent on spreadsheets?
- How will the solution automate manual processes to lower costs and streamline operations?
PART I
Current Landscape
Carried interest participant allocation plans: The current state of a complicated landscape
Types of carry plan models
Carry and incentive plans vary greatly across the alternative investment industry. Firms may structure carry plans to allocate participant award percentages by fund, investment or investment tranche, or vintage year for each fund and/or deal. Each firm determines the model that will offer the greatest benefits to their organization and effectively reward team members.
Fund-level model
Allocates carry percentages (or points or DAW) by fund, incentivizing professionals based on the fund’s overall success rather than its individual investment performance. Often used by firms with a high volume of investments or trading activity as well as traditional buyout private equity and venture capital firms. Partners/employees may have carry percentages, dollar equivalent value, or points allocated for each fund that the firm manages, receiving proceeds based on each fund’s overall success.
Investment level (and investment tranche level) model
Also known as deal-by-deal allocations, with awards based on the individual success of investments, not the fund, though the two may be utilized concurrently. Employees, partners, and affiliates may be awarded based on their participation in specific deals, their role as a lead professional sourcing the deal, for other business contributions to a specific investment, or if employed during periods of successful investing of specific investments. Some firms will also base awards on funding rounds of the same investment at different points in time (or tranches).
Vintage shares and hybrid/ dynamic models
Based on the financial year, with carry allocations adjusted per each team member’s contribution on an annual basis. Yearly points allocations are used in conjunction with fund and investment level carry allocations. For example, the allocations used for investments made in a specific year will automatically use the participants’ carry percentages in that year for the fund making the investment. Firms may make vintage share allocations consistent by fund, or across funds.
Vesting
Participants’ carry awards include stipulations (‘vesting schedules’) based on tenure at their firm that also dictate how much they are eligible for should they separate from the firm. For instance, in a four-year vesting schedule, individuals’ awards could accrue yearly, quarterly, or monthly, with accrued awards forfeited if the individual separates from the organization in the first year.
Vesting schedules
These schedules are linked to the level where carry is granted to participants, and may be:
- Time-based: On a multiple-year vesting schedule, for instance, individuals’ awards might accrue yearly, quarterly, or monthly.
- Capital deployment based: Depending on where capital is deployed, each participant receives a carry allocation for each investment during the year of their allocations.
- Hold backs – It’s typical for deal-by-deal carry plans to hold back a specific portion until a deal is realized. This incentivizes employees to stay to see deals through exit.
Vesting arrangements, terms, and cliffs
These are based on a broad range of standards and exceptions, such as:
- A 20 percent per annum (or 5-year) vesting schedule with an initial one-year cliff (0 percent in the first year) with yearly, quarterly, or monthly vesting thereafter.
- A portion vested each year (i.e., 22.5 percent for 4 years), leaving 10 percent unvested until the fund is fully liquidated, allowing the firm to maintain reserves.
- Awards of 70 percent in the fund’s first 3-5 years, and the remaining 30 percent over the life of the fund or the investment.
- Vesting starting in the fourth year, with 20 percent each year thereafter.
Forfeitures
The protocol for forfeiting carry and compensation varies firm by firm. Upon an employee’s separation, some firms add or adjust accrued carry outside of the standard calculated vesting agreement. For example, if an employee separates from the organization in the first year, they might forfeit carry. Other changes could be based on employee performance. A good leaver (or someone who exits the firm for blameless reasons, like ill health) might not suffer additional forfeitures, while a bad leaver (who is terminated due to misconduct) could face additional forfeitures.
Forfeited carry from terminated employees may be reallocated to the reserve pool of unallocated carry, becoming a tool for incentivizing team members to earn discretionary carry awards through the life of the fund. Or, if allocated to a pool of executive-level employees, forfeited carry would most likely be split pro rata based on their existing percentages.
Document management
Organizing, tracking, and safeguarding documents – including employee legal agreements (i.e., carry plans and LPAs), award letters, distribution letters, annual or quarterly statements, and K-1s.) – play a critical role in modern compensation and carry plans. Many CFOs and Heads of Finance are replacing spreadsheets and manual filing with SaaS solutions to improve controls and reduce errors, providing digital participant portals with review, acknowledge receipt, and sign features. This approach cuts through complexities as it better protects sensitive data, supports more accurate reporting and tracking, and increases employee satisfaction.
Reporting and total rewards statements
Employees and partners expect seamless reporting regarding their participation in financial plans. In a recent PFA Solutions survey, 40 percent of finance directors and CFOs said they were making improved total rewards statements a priority. New best practices in compensation address the link not just between retention and total rewards, but how those rewards are conveyed. Private equity firms and other alternative investment funds are working to provide the kind of comprehensive reporting and statements that meet those needs via multiple venues – in PDFs, smartphone apps, automated dashboards, and easily accessible drill-throughs that show base, bonus, carried interest awards, vested and unvested balances, management company exposure, co-investments, interest calculations for loan facilities, and forecasts into future value.
Distributions
Distributions are payments to members in carry and compensation plans. They occur when individual General Partner/compensation and incentive plan (CIP) participants (e.g., employees, partners, and affiliates) receive a share of the GP profits based on their predetermined carried interest allocations, awarded at the vintage, fund, investment, or investment-tranche level. Unlike fund-level distribution, these render payments to the carry participants of the GP/CIP entity within the fund. They can follow the waterfall distribution or have other triggers, like no distributions until all tax advances are paid back or transitioned as investments in subsequent funds. In addition to cash distributions, firms sometimes pay tax distributions to cover participants’ tax obligations.
Firms may also make additional discretionary awards to carry participants based on individual contributions and other factors if not all carry is fully allocated (i.e., reserve, or unallocated buckets). Once each participant’s carry amount is calculated, adjustments are applied for tax withholdings, escrow withholdings (typically 20 to 30 percent), loans, and prior tax advances, etc., if applicable. Firms may distribute for single entities, multiple entities, or investments (including netting positive and negative balances across multiple investments). Distributions are generated with withholdings and notice letters.
Forecasts / Dollars at Work
Forecasts can convey to employees the potential future value of their total rewards, another powerful retention driver. Providing employees and participants with an eye on the future value of their compensation arrangements and carry plans. Sometimes firms refer to forecasts as Dollars-at-Work (“DAW”). There are variations across the industry on how DAW is calculated. The most common approach for new funds is to assume a 2x multiple of raised capital.
For example, if a fund manager has raised $1 billion in capital commitments from investors and has a 20 percent incentive fee then they could receive approximately $200 million in carried interest if their investments doubled in value (not taking into consideration the various hurdles within the waterfall provisions). If a carry participant had a 1 percent carried interest allocation to this fund then that participant would have $2 million in DAW (200mm * 1%). When the fund has advanced in its life and has made investments that can be valued then they may calculate DAW differently since they have a better sense of the current potential earnings. It is also common for fund managers to provide DAW as part of employees’ award letters since dollar amounts may be more meaningful for carry participants to correlate to a value rather than percentages or units.
Management company ownership
The management company entity ownership is usually limited to founders and other partners of the firm. As companies evolve their analytics on employee all-in compensation reporting, firms are producing aggregated reporting to show partners their management company ownership stake along with their carried interest awards and their personal mandatory and discretionary co-investments.
PART II
Complexity and Challenges
Complexity and challenges in carry and compensation today
Allocation/incentive plans are more complex than ever
CFOs, COOs, Controllers, and other finance leaders who are responsible for managing carried interest and other compensation plans with complexities ever rising as successful private equity, venture capital, or hedge funds are discovering that their Excel spreadsheets aren’t up to the task of managing several funds at once.
Reporting for GPs
Today’s carry and compensation reporting involves various elements, including awards, vested versus non-vested amounts, forecasts, past distributions, escrow holdbacks, tax advances, co-investments, loans, management fee waivers, cash compensation (salary, bonus, benefits), and other elements along with historical changes. Managing these data points is critical. Firms must institute rigor in their internal process and reviews to reduce the chance of miscalculations and improve controls. Reporting is also a key factor in an improved participant experience and meets evolving expectations around analytics and transparency.
Handling one-off exceptions
The specialized nature of participant agreements and one-off exceptions add a set of unique circumstances. GPs need to factor in how to handle these exceptions when they determine how to allocate carry and other deferred compensation awards.
Handling varying vesting schedules
Vesting schedules are predefined rules with varying stipulations that determine an employee’s tenure at their firm to dictate the proportion of the awards retained should the employee leave. But each firm has its own schedules and timeframes, which can vary by fund and by participant within a fund. Awards may accrue across anything from yearly to monthly, and forfeits may be based on a whole range of criteria. There are also performance-based portions of vesting schedules that many firms are beginning to incorporate into their incentive plans.
Expanding carry pool members
GPs need to be able to add new participants (such as employees, trusts, and legal entities) and associated allocations (and the consequent reduction of reserve pool or dilutable members), as well as handle different carry pool scenarios: standard, phantom, or executive pools.
Deal by deal/tranche by tranche
There are countless ways for a firm to structure its compensation and carry plans to allocate participant award percentages at different levels, including deal-by-deal, which awards individual participants on specific deals or investments, or tranche by tranche, which are based on funding rounds of the same investment at different points in time. Having varying allocation schedules by investment or investment tranche adds another level of operational management for firms that grant awards at this level.
Shares vs. Dollars at Work vs. Percentages
Traditionally, firms allocate shares or a percentage to participants of carried interest. For example, a participant may receive 250 shares or 2.5 percent in the plan. A new trend is to allocate a dollars-at-work value so the recipient has a better understanding of the potential future awards.
For example, a $1 billion fund expected to return 2x, with a 20 percent promotion rate is projected to generate $200 million in carried interest. A 2.5 percent allocation equates to a DAW value of $5 million. Many firms are finding the DAW figure more meaningful. It’s important that DAW is heavily caveated as an estimated value and not a guarantee.
Tax complexities
There are various tax considerations when structuring carry plans, when allocating carry for new joiners (and establishing hurdles when there is value), and for distributions. Relating to distributions, each participant’s carry amount is calculated, and various adjustments need to be applied to tax withholdings and prior tax advances where applicable. There may be triggers related to taxes as well, such as prohibitions on distributions until all tax advances are paid back. There are also tax implications for late joiners who receive carry allocations at the fund level when there is positive accrued carry. True carry holders and phantom carry holders are also treated differently from a tax perspective. True carry holders’ distributions are treated as capital gains while phantom awards are treated as ordinary income. For GPs, one of the biggest challenges is handling tax complexities within the overall management of carry plans.
Hurdles and catch-ups
Defining compensation and carry programs is evolving. There are many more pieces in the puzzle than before. More plans are instituting hurdles, or the milestones an individual participant has to hit before they get paid or get their carry if they are a new joiner. As noted above, there are tax implications that relate to new joiner awards in existing funds that have accrued positive carry values. Another common arrangement is to have carry catch-up provisions for future distributions. For instance, the new joiner may be entitled to receive all portions of the future distributions (after meeting the hurdle) until they are caught up and in line with all other participants. After the catch-up, all participants would come in line and receive a pro-rata allocation of future distributions.
Co-investments and carry awards
Employee capital co-investments, or their personal capital contributions, are often considered an element of compensation. Many firms include the value of members’ contributions in reporting that includes details on carried interest awards and associated value. Each firm handles co-investments slightly differently, however. Some firms will require mandatory commitments to receive carry awards, and some firms will not require mandatory commitments except for the most senior members. Generally, there is usually a close correlation between co-investments and carry. However, outlier cases happen where all employees receive carry allocations but only a few members contribute capital.
Management fee waivers
Similar to loan programs, participant contributions can be funded via alternative sources outside of individual participants’ personal capital. One such method is through the income received through the management fees received from outside investors in the fund. There are typically specific individuals that receive this benefit and there are associate tax strategies related to funding contributions using management fee waivers. Similar to loans, a portion is still typically funded via cash.
Loan programs
As a benefit to employees, many firms have loan programs to assist members with funding their co-investment obligations. These loans can be sourced from outside banks or internally by the managing members. Loan programs can be structured across funds or can be isolated to specific funds. There are always stipulations on the loan programs, such as limiting members to financing 75 percent of a given contribution and funding the remainder with cash. If a fund manager is providing the financing, then the fund manager’s operations and accounting staff will calculate the interest accruals. Outside banking providers will calculate interest accruals if they are providing the financing.
Calls and distributions
Capital calls and distributions are also part of the complexity around carry and co-investment plan management. When generating capital call notices for individual participants, various elements must be incorporated in the notices, such as the amount funded through loans, amounts funded through co-investments, and passed distributions that get netted from the gross capital call amount. Similarly, distributions can contain various elements to arrive at the final net distribution amount, including tax withholdings, escrow holdbacks, loan repayments, etc. Many firms will include contribution, distribution, and other balances within overall total reward statements, which requires strong data management.
Deferred income and bonuses
In addition to deferred income plans, such as carried interest plans, some firms also structure other long-term incentive plans. Deferred bonuses and income can be structured in various forms. Sometimes deferred bonuses are tied to the success of underlying funds that the firm manages, or can accrue interest based off a set interest rate. Deferred bonuses are another method to align interests to incentivize the long-term success of the firm and aid in the retention of employees.
PART III
Tech as a Differentiator
Technology as a differentiator in carry management
Improved carry management and reporting
CFOs and Heads of Finance are looking to technology to improve management processes and reporting of carry interest awards to participants. A 2023 roundtable of private equity and venture capital leaders in New York shared their biggest priorities for improving how they handle – and offer – carry and compensation. With carry plans more complex than ever, these priorities paint a telling picture when it comes to tools that optimize compensation and carry.
Total reward statements
Total reward statements were at the top of the list as a priority for CFOs and Heads of Finance. In the 2023 PFA Roundtable survey, more than 40 percent of the leaders present said they wanted to get to the point where they could offer total reward statements and were counting on technology to provide more transparency and support talent retention.
Improved dashboarding and drill-throughs
Improved dashboarding and drill-throughs offer better transparency, providing employees with online access to documents as well as relevant data and analytics, including carry awards, co-investments and vesting, distribution notices, and periodic statements. Drill-throughs provide another level of analytics in detail, offering the new data in a pop-up or pull-down statement. This kind of participant experience, with interactive dashboards, better matches rising expectations among users for the same features offered in retail brokerage firms.
Scaling for growth
Scaling for growth was a priority for eighteen percent of those at the roundtable. A solution needs to be able to scale for growth along with the firm, without diminishing any functions or reporting capabilities. Firms need to be able to aggregate compensation data across a growing enterprise, providing the same detailed analytics, budgeting, and forecasting, and providing employee self-service, even as the number of carry pool members expands, and new vesting arrangements arise.
Improved controls
Improved controls were a priority for 12 percent of roundtable participants. Given the sensitivity of carry and compensation data, extreme care must be taken to maintain control of this data and ensure calculations are correct. Private capital firms are leveraging software applications to improve controls with a range of best practices, from managing trusty spreadsheets that are still necessary for aspects of the process to managing data across funds, changing allocations over time, building interfaces across systems, better system implementations and ongoing management, enhanced data security and following the right cyber security protocols, and improved participant access.
Professional reporting for partners and employees
Professional reporting for partners and employees was another priority as noted by another 12 percent of roundtable participants. They’re looking for reporting for employees and partners that includes “all-in” compensation reporting on par with what might be found at a commercial brokerage firm. Reporting needs to adjust the lens from macro to micro; from high-level snapshots and statements to highly detailed information; from ad-hoc analytics for management reporting to vesting forfeiture analysis and forecasts, with employee carry and investments, as well as unrealized and future carry, aggregated into a single statement.
Self-service for employees
Self-service for employees was cited by another 18 percent of roundtable participants to enrich the employee experience. This demand addresses the growing trend across the industry to provide self-service access for compensation data, including carried interest distributions, tax advances for carry, details on employees’ personal investments in funds (as in, co-investments), and compensation – base, bonus, and retirement benefits, along with wire instructions, report building, forecasting, and analytics – as one might find in a retail brokerage firm.
Reducing key person dependencies frees
Reducing key person dependencies frees up carry plan management from the increasingly complicated interdependencies associated with today’s complex plans and arrangements. While it’s critical to have effective management of carry and compensation data, relying on a single, indispensable individual for critical information can hamper operational management activities. Software solutions and automation, in contrast, can enhance controls and efficiencies so that any team member, with approvals, can manage essential data, improve analytics, and promote transparency.
Interest calculations for loan facilities
Interest calculations for loan facilities are another aspect of carry and compensation that firms should include in reporting. Firms want to provide individuals with a compensation dashboard that gives them a full view into their compensation and carry, extending beyond such factors as base, bonus, and carried interest awards to management company exposure, co-investments, and calculating interest on loan arrangements.
PART IV
Strategies for Enhancing Controls
Improving Controls in Carry Management
Optimizing Operations
Given the sensitivity of carry and compensation data, extreme care must be taken to maintain control of this data and ensure calculations are correct. Private capital firms are currently enhancing their use of technology to improve controls, efficiencies, and scalability, including these key areas of focus:
Spreadsheet management
Spreadsheets have been the traditional method to manage carried interest allocations and other compensation arrangements. Although many firms are shifting to the use of systems to manage carry and compensation data, in certain cases spreadsheets will remain a part of the process. These should be carefully stored in a highly secure location with version control protocols and backup storage in case files become corrupt or mistakes are made within the files. Other safeguards should be deployed, too, including password protection, periodic formula review, links versus hard-coding numbers wherever possible, color coding for user-provided values versus calculated amounts, and locking static cells.
Managing data across funds
Many firms face challenges when they lack consistency in their spreadsheets across funds. Unless the funds are close to liquidation, alignment of spreadsheet format across funds improves aggregated reporting, transferability to other team members, and efficiencies when/if transitioning to a new system.
Managing allocations that change over time
Managing allocation changes over time is especially important as employees elevate within the firm. Discretionary awards, joiners, and leavers also increase the risk of error in calculating carry awards. Software applications, as opposed to spreadsheets, provide built-in capabilities for tracking and tagging changes.
Interfacing across systems
Carry and compensation data may not change frequently, and the volume of transactional activity may not be high, thereby not warranting direct data interfaces. However, there is a risk of mismanaging data among systems – and that risk can be mitigated by automating data interfaces such as personal information from human resource systems, compensation data from payroll systems, and fund and investment performance metrics from accounting systems.
Smooth system implementations
Implementing carry management solutions can be challenging due to the specialized nature of participant agreements and exceptions. Each firm in the private capital industry has unique circumstances that determine how they allocate carry and other deferred compensation awards. It’s always important to focus on the highest priority items and use an agile approach to gain benefits in iterations. For example, while the ultimate vision may be a self-service platform where all participants can access their carry awards via an online portal, other steps might be necessary before achieving this goal, such as reporting for a specific fund or producing initial carry and compensation statements. Producing the necessary reports will also require significant setup and configuration to build the foundation for more sophisticated system functionalities.
Trustworthy ongoing system management
Carry and compensation management teams are small by design to protect the confidentiality of the data. Using systems to manage carry and compensation requires a centralized and secure location for this data for long-term scalability. Since the users of the system(s) may be limited, it is important to cross-train and ensure appropriate “how to” documentation is in place so team members can transition between activities efficiently.
Data security
It cannot be overstated that carry and compensation information is extremely sensitive and should be handled with high security. When implementing a solution, follow these best practices from a security perspective:
- Use password protection and document-sharing portals approved by the firm’s IT department when sharing files with third parties.
- Use software platforms that ‘link’ to the existing security protocols (i.e., active directory) and multi-factor authentication protocols.
- Mask and anonymize highly sensitive data in program development and test environments.
- Use system security functionality for access privileges if a broad set of users will have access to the system (i.e., so participants cannot see their co-worker’s compensation details).
- Use approval workflows for highly sensitive activities (e.g., award updates, wire instruction updates, distribution notice production, etc.).
- Use systems that have data encryption frameworks in place.
Easy participant access
To provide reporting closer to that used for ‘private wealth management,’ many firms are enhancing their capabilities to allow participants, including existing and former employees, to access data and documents via a portal. Historical documents and data can be housed in a central location where individuals can update their personal information (absent other systems a firm might employ.) Online signatory functionality can also be used to manage approvals of award letters and other compensation statements.
No matter the functionality used, following relevant cybersecurity protocols is critical. For example, portals should have a time-out function and should leverage the firm’s active directory protocols for data security, along with all other data security measures that are part of the firm’s overall cyber security program.
PART V
Data and Analytics
Why data and analytics are important
Private fund data and analytics: Best industry practices for implementing carry management solutions
The growing complexity of the carry and compensation process is prompting private equity and private capital leaders to look for new approaches to handling allocation and incentive plans. Leaders are turning to technological and analytical solutions as well as new data models to improve business operations and carry management. These solutions are driving a whole new set of best practices that address key considerations in an effective framework.
Problem: Disparate systems and constricted access
Take the very common issue of disparate systems and constricted access. Typically, each private capital firm will have its own array of applications to cover various functions. In some cases, the number of systems may exceed 100 across third-party vendors and proprietary tools. Among the many challenges this causes is constricted access. With data housed in various locations, those needing access to certain data and information may require another team’s assistance. These steps add more complexity for specific reporting, one-off exceptions, and vesting schedules of new allocation and incentive plans. To resolve this issue, firms have begun implementing aggregator and analytics solutions.
Solution: Cloud-based software suites and centralized data portals with built-in analytics
A centralized data portal through a software-as-a-service (SaaS) subscription/licensing model allows firms to better organize their data across key areas of their business, taking them out of the traditional silos associated with different data sources. Firms can leverage these portals and their dashboards to improve drill-throughs, examine available market data, and better assess their investments’ operating metrics. Many are opting to improve internal reporting to employees on their carried interest, co-investment, and other forms of compensation in the process. Deploying built-in analytical solutions like these allows individuals across the organization to access data more quickly, cutting down time spent on spreadsheets and other tasks.
Considerations when deploying analytics solutions
When improving a data framework and deploying analytical solutions, firms should address these considerations:
Build a solid foundation
To generate quality analytics and retrieve meaningful raw data, information must be well organized through normalization data practices, with:
- Unique keys: Create a standard naming convention across systems (e.g., unique IDs for investors and investments). Many firms have the same information across systems but naming conventions vary, causing mismatches and breaks.
- Lookup fields: Use drop-down fields as opposed to free text to tag/label when possible. Examples include investment referential data (e.g., standard sectors, industries, and strategy classifications) and investor referential data (investor type, family, and class).
- Data management and configuration: Restrict configuration abilities to certain individuals who control certain types of data (i.e., look-up values, new user-defined fields, and mapping between systems). Ensure business users can request updates and the individuals responsible for updating system configurations understand the business needs and any downstream impacts on reporting.
- Data categorization: Well-defined transaction mapping and grouping mechanisms are critical when migrating granular transactional data, such as from accounting systems to a data warehouse. Additionally, once the dashboarding or data portal layer is implemented, it is crucial to focus on the data model and persisted data versus calculated data to get accurate. meaningful results.
Continually invest time and resources
Success is only feasible if the proper resources are allocated to build a foundation and properly manage firm details. Anecdotally, firms that have built masterful data management modules have dedicated adequate internal resources to the integration or have partnered with third-party administrators and technology services providers. Many have done both. This approach lets firms scale for growth, improve controls, and make reporting more efficient.
Use the right tool for your business
For large and complex operations with sufficient staffing, it may be appropriate to develop a solution in-house. However, this option will require significant investment to establish the data model and then to maintain the data and reporting layers on an ongoing basis. Expectations of improved reporting for participant experience, expansion of carry pool members, and new vesting arrangements have also made this option less tenable.
Many firms have been successful in developing a data warehouse and creating business intelligence reporting. Other external solutions also provide an interactive, digital experience through web browsers and mobile devices. In both cases, firms might need to develop specialized reporting to retrieve the analytics required. It is important to consider all available options when undertaking a data and analytics effort.
Embrace an iterative process to an ideal solution
Establishing the ideal solution is an iterative process that may take years to perfect or may never be complete due to competing priorities. To document progress from the onset, compose a roadmap listing small to moderate goals. The private capital industry is complex, with strategies that constantly evolve, delaying initiatives and moving targets. Be aware of these risks while moving forward on the path to improvement.
Today, the industry is transitioning from spreadsheets as the key data storage mechanism to data analytics tools used in conjunction with fit-for-purpose applications. The migration allows for easier access to data and forecasts, self-service report building, interest calculations for loan facilities, and improved tear sheet reporting.
PART VI:
Essential Questions
Essential questions to ask about solutions
What private capital firms should ask their prospective carry management partners
As the industry moves from spreadsheets to fit-for-purpose applications, CFOs and other Heads of Finance are facing an array of potential partners when it comes to carry management. Each individual firm will have special criteria and unique needs. To find the right solution, there are several questions to ask to identify if a potential partner is right for your firm:
Can the solution cut through the complexities of your firm’s plans?
Carry and compensation management has gotten increasingly complex – and GP teams are lean. Whatever the solution, it should provide a strong data model with quick and easy access to information for both internal and external parties via a user-friendly platform.
Does the solution offer one source of truth for GPs, employees, investors, and others?
Look for a central platform with a centralized data portal with dashboarding, drill-throughs, analytics, and reporting to allow individuals across the organization to access information quickly.
Can it produce total reward statements?
Look for a solution that provides total reward statements, a key part of reporting that’s expected by more and more employees and partners and a priority according to a growing number of finance directors and CFOs. Statements should be available through multiple channels, easily accessed, and provide a comprehensive picture for carry participants.
How will the solution improve controls and security?
Look for a solution that offers a centralized data hub to improve controls as well as enhanced data security that follows the right cyber security protocols and controls access to sensitive data.
Why will the solution help recruit and retain top talent?
Seamlessness, transparency, a user-friendly platform, and self-service are all on the common list of employee expectations when it comes to any digital tools they use, and compensation and carry are no exception. Further, being able to visualize how their rewards will change over time has been shown to boost employee engagement and retention. As more firms opt for SaaS solutions to improve their carry management, those that aim to be competitive in the hiring and talent arenas need to take note.
Will it increase efficiency and reduce downtime spent on spreadsheets?
Spreadsheets will likely always play some role in compensation and carry. But the right solution will consolidate processes as well as data, reducing the risk of errors that result from manually transferring and handling multiple spreadsheets.
How will the solution automate manual processes to lower costs and streamline operations?
Freeing up teams from manual processes and reducing the costs associated with miscalculations and data due to siloed applications tend to be best practices in any financial operation. Automating manual processes increases efficiency, freeing up time, energy, and resources to help scale for growth.
Conclusion
Carry management can boost retention
When it comes to attracting and holding on to the best and brightest, private capital firms know the competition is intense. The smartest, most ambitious people are always on the lookout for better opportunities. Carry plans may be a promising part of compensation in terms of attracting talent, but in those years before an employee crosses the threshold of earning carried interest, they need a reason to stay until they do.
Providing employees with clear visibility into the value of their total compensation – including everything from salaries to benefits, bonuses, carried-interest awards, co-investments, past distributions, and forecasting (or dollars-at-work) – can win the loyalty of those who hold your future success in their hands.
Each private capital firm will have its own pace for digitally transforming its carry management – it could be a gradual replacement of manual spreadsheets with SaaS applications or a total reengineering in one phase. However it’s done, shifting to a digital solution sends a clear message that management and leadership care about everyone in the firm.
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Additional Resources
- PFA Solutions
- Private Funds CFO: PFA Solutions on how automation can ease the carry and compensation burden
- DC Inno: This Fairfax fintech serves venture capital firms. It just secured funding from a prospective client.
- Global Custodian: Here’s what workflow innovation looks like for private capital fund operations
- Private Funds CFO: A digital transformation is sweeping through compensation and carried interest
- Key Quotes from Richard Change on Technology Solutions – Terrance J. O’Malley
