Richard Change, PFA co-founder and managing partner joins Mariya Stefanova from the PEAI Global Directory of Carried Interest Products and Services for an interview on private equity compensation, carry allocations and carry plans.
Mariya Stefanova, PEAI: The allocation of carried interest down to the Carried Interest Holders (CIHs) is an important incentive mechanism, in addition to the fund level carried interest arrangement. What is the current status of the private equity (PE) industry in that respect?
Richard Change, PFA Solutions: Carried interest and other compensation arrangements
continue to be a major focus of senior leadership at Alternative Investment firms. Anecdotally,
we are seeing talent in high demand, so attracting and retaining top resources is mission
critical to a firm’s success. We are also seeing the continued emergence of minority interest
holders taking stakes in the GP entity across companies, becoming Carried Interest Holders
alongside the GP members.
Mariya Stefanova: With the increased complexities, evolution of the private equity (PE)
asset class, the growth of a PE firm in terms of the number of funds and different strategies
one PE Manger runs, more and more GPs turn to more automated solutions, particularly
firms with larger deal teams operating across a variety of jurisdiction and multiple
strategies. What is that you can offer to GPs and how can your automated platform
FirmView make the GP’s life easier?
Richard Change: Clients typically seek us out when they have outgrown Excel and
recognize that they need to centralize their carried interest allocations, eliminate their manual
processes, and automate the complexities of their plans. Clients also value the robust security
and accessibility of our platform for plan administrators and Carried Interest Holders. Our
platform also offers the ability to combine compensation data alongside carry, providing a
complete picture of compensation for every employee and carry participant across the firm.
We are also excited about our new partnership with DocuSign that will helps us facilitate the
collection of signature acknowledgements for new awards and internal co-investment
Mariya Stefanova: In addition to making the GP’s life easier, how can PFA’s FirmView
product enrich the employees’ experience?
Richard Change: There is a growing trend across the industry to provide ‘self-service’ access
to compensation data. This includes carried interest distributions, tax advances for carry,
accrued carry as well as details on employees’ personal investments in funds (i.e., co-investments) and compensation (i.e., base, bonus, and retirement benefits). Many of our clients
are requesting this ‘all-in’ compensation reporting where individuals can access interactive
dashboards as well as pull down statements from our platform. This is an exciting area for us to
provide these new digital experiences similar to what you’ll find with retail brokerage firms.
Mariya Stefanova: Sophisticated investors usually look not only at the fund-level carry
arrangement (e.g. whole-of-fund/European-style carry vs. true deal-by-deal vs. hybrid
deal-by-deal), but also at the carry-vehicles level as an incentive mechanism. Can the LPs
benefit from that information, and if so, how? Do you service LPs, and what kind of reports
can you offer to them that would help them, for example, in the due diligence process for
a potential target and/or on an ongoing basis?
Richard Change: There are benefits to LPs from several perspectives. LPs benefit from very
well-crafted GP carry plans where employees and partners’ interests are effectively aligned
for individual team members to make the best possible decisions for the fund and to retain
team members. From an operations perspective, LPs benefit from knowing that strong
processes and controls are in place to manage this data along with all other fund operations
data, such as using robust systems. Additionally, if an LP requires details on how carry is
allocated among key individuals (or historical data), firms that have systems in place for this
can respond quicker.
Mariya Stefanova: Carry and incentive plans vary across the PE industry in an
attempt to effectively award employees, partners, and affiliates, for the efforts that they
contribute to the organization as a whole, and the specific performance attributable to
a particular fund. Firms may structure their carry plans to allocate participant award
percentages at various levels (e.g., by fund, by investment or investment tranche, or by
vintage year for each fund and/or deal). What types of carry plans does FirmView
support, what are the most common plans that you come across and why do you think
Richard Change: We support all of the above scenarios in FirmView. From an
implementation perspective, fund level carry programs are typically the most straight forward,
however we are also seeing some hybrid carry plans where there is a combination of fund,
vintage and investment-by-investment models. We have invested a considerable amount of
time and energy on developing our solution to be a flexible platform for all types of carry
arrangements. With that being said, we are consistently seeing new arrangements and are
actively enhancing our platform for our clients.
Mariya Stefanova: How should a full employee compensation reporting look like in
your opinion and what are the most valuable reports to GPs, LPs and employees at an
aggregate level, as well as drilling down into the aggregate information?
Richard Change: Our clients value both high-level snapshot reporting and statements as
well as very detailed reporting. Firms are seeing significant value in ad-hoc analytics, vesting
forfeiture analysis, forecasts, and aggregating employee carry and employee investments
into a single statement. These reports become even more valuable when our clients combine
this information with future or ‘target’ values of carry that’s been allocated. These ‘Carry
Dollars at Work’ reports and components provide carry recipients, as well as senior
leadership, a better perspective of unrealized carry that has been awarded and also what
has not been awarded.
Mariya Stefanova: And a related question – what are the functionalities in FirmView that
you would say your clients value the most?
Richard Change: FirmView Carry Management allows firms to manage all compensation
arrangements, including complex carry allocations, vesting rules, distribution production,
capital calls, and carry forecasting. Our clients can produce ad-hoc reporting for
management analytics as well as produce various custom statements for employees.
Additionally, the system includes a secure participant portal for employees to access
dashboards and documents. Given all the capabilities listed above, simply relieving clients
of their many Excel files brings a great deal of value which we are proud of accomplishing.
Mariya Stefanova: Many GPs are reluctant to outsource this function to a third-party
provider, including to their fund administrators, due to the sensitive nature of the
information, as GPs don’t want their carry allocation information to get leaked in the press
(worst case scenario) and become an issue as it happened in the UK in 2007, for
instance. How do you address these confidentiality issues – how are you making sure that
this can never happen?
Richard Change: All data is encrypted, at motion and at rest, and we integrate with our
clients’ authentication protocols, allowing them to provide access to their employees using
only their existing network credentials issued by the firm. All changes are also logged in the
system when changes are made, processes are generated, and certain reports are run. User
rights and privileges are configurable in the system and administrator users can view login
access. Additionally, there are automatic sign-outs and other cyber security controls in place
to ensure our clients’ data stays completely safe.
Mariya Stefanova: When we were working on your contribution to our 2021 PEAI
Carry Directory, you’ve said something very memorable that is still stuck with me, it was
something along these lines: ‘The future of private fund compensation reporting is to
provide the same look and feel of commercial banking and investment statements with
mobile and online access.’ As a user, I have to agree with that. Is this still valid, and if so,
did you manage to achieve it?
Richard Change: This is still valid. Every week we receive new requests and ideas from our
clients on how we can bring the retail experience into our industry. We are constantly
evolving our platform and its various components to deliver a superior user experience
across our entire platform.
Mariya Stefanova: What is the ‘next Big Thing’ that PFA Solutions is after? What
have you learned over the past few years, particularly with the COVID-19 game changing impact about what the alternative asset class, and private equity in
particular, needs most desperately?
Richard Change: The ‘next big thing’ for us is to continue to expand our product out in
multiple fronts by helping clients automate and streamline their reporting. We are actively
working with clients to enhance the all-in compensation capabilities, the participant portal,
as well as many components of our performance management module which is a digital
gateway to fund level data (i.e., investments, and limited partner information). We have a
robust pipeline of new initiatives that will further evolve the digital experiences of our industry
and we look forward to releasing them to the market!
Mariya Stefanova: Thanks very much for your insight into the private equity
compensation, carry allocations and carry plans state of affairs and what PFA has to
offer to GPs and their employees, and the industry as a whole, in developing a more
sophisticated and highly efficient compensation model. I wish you success in achieving
all your goals and building a more robust and transparent industry.
Richard Change is the co-founder and managing partner of PFA Solutions. Richard has 20 years of experience developing technology solutions and was the former Chief Architect at The Carlyle Group.