Co-investment carry is charged vehicle by vehicle, with no netting of losers against winners, so the headline rate understates what the co-investor actually pays.
Deal-by-deal carry charges the carry rate on every winning deal and never gives it back on the losers, so it costs the co-investor exactly the carry rate times the losses on losing deals more than carry on the pooled programme. On an illustrative five-deal programme at 10 per cent carry, grossing 1.70x, that is 4.5 million of carry instead of 3.5: an effective rate of 12.86 per cent, not 10. On a programme that only breaks even gross, the co-investor still pays carry and gets back 0.97x.
Worked in full in The Co-Investment Practitioner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most co-investments sit in their own vehicle, one per company. When the sponsor charges carry on them, it is calculated on that vehicle alone: there is no portfolio for a loss to net against and usually no clawback across vehicles. A fund's European waterfall pays carry on the whole fund, after every loss. The headline rates are therefore not comparable, and a 10 per cent co-investment carry that looks like half the fund's 20 per cent can be worth considerably more than half.
| Deal | Cheque | Gross multiple | Proceeds | Profit |
|---|---|---|---|---|
| 1 | 10.0 | 3.0x | 30.0 | 20.0 |
| 2 | 10.0 | 2.5x | 25.0 | 15.0 |
| 3 | 10.0 | 2.0x | 20.0 | 10.0 |
| 4 | 10.0 | 1.0x | 10.0 | 0.0 |
| 5 | 10.0 | 0.0x | 0.0 | −10.0 |
| Programme | 50.0 | 1.70x | 85.0 | 35.0 |
Carry is 10 per cent of profit, with no hurdle and no management fee, so that the only thing being measured is where the carry is computed. Adding a per-deal hurdle changes the levels, not the mechanism.
Deal-by-deal carry = carry rate × sum of profits on winning deals
Pooled carry = carry rate × programme profit (winners’ profits − losers’ losses)
Difference = carry rate × losses on losing deals (while the programme is in profit overall; if it loses money, the difference is the whole deal-by-deal carry)
Effective rate = deal-by-deal carry ÷ programme profit
In Excel, with profits in a column: =Carry*SUMIF(Profit,">0") for deal by deal, =Carry*MAX(SUM(Profit),0) pooled.
Winners make 20.0 + 15.0 + 10.0 = 45.0 million, and deal-by-deal carry is 10% of that, 4.5 million. The programme makes 35.0 million after the 10.0 loss on deal 5, so pooled carry would be 3.5 million. The difference, 1.0 million, is 10 per cent of the 10.0 lost: the sponsor is paid on deal 5's capital as if it had never been lost. Carry of 4.5 on a profit of 35.0 is an effective rate of 12.86 per cent, 28.6 per cent more than the headline.
| Carry basis | Carry paid | Effective rate | Net multiple |
|---|---|---|---|
| Pooled across the programme | 3.5 | 10.00% | 1.63x |
| Deal by deal | 4.5 | 12.86% | 1.61x |
In multiple terms the gap looks small, 0.02x. That is because the carry rate is low and the losses are modest. Both assumptions do the work, and neither is safe.
| Outcomes (gross multiples) | Gross | Losses | Carry, deal by deal | Effective rate | Net |
|---|---|---|---|---|---|
| All 1.7x | 1.70x | 0.0 | 3.5 | 10.00% | 1.63x |
| 3.0, 2.5, 2.0, 1.0, 0.0 | 1.70x | 10.0 | 4.5 | 12.86% | 1.61x |
| 5.0, 2.5, 0.5, 0.5, 0.0 | 1.70x | 20.0 | 5.5 | 15.71% | 1.59x |
| 8.5, then four zeros | 1.70x | 40.0 | 7.5 | 21.43% | 1.55x |
| 2.0, 1.5, 1.0, 0.5, 0.0 | 1.00x | 15.0 | 1.5 | n/a | 0.97x |
Gross performance is identical in the first four rows. The effective rate climbs from the headline 10.00 per cent to 21.43 per cent purely through dispersion, because every unit of loss adds one tenth of a unit of carry. A programme concentrated in a few large outcomes, which is what private equity returns usually look like, pays the most. In the last row the programme returns its capital gross and the co-investor still pays 1.5 million to the sponsor on the two winners: a gross break-even becomes a 0.97x net loss.
Double the carry to 20 per cent and every carry amount doubles: on the base case, 9.0 million deal by deal against 7.0 pooled, net 1.52x against 1.56x.
The test is one line. Before agreeing deal-by-deal carry, estimate the losses the programme will take on its losing deals and multiply by the carry rate. That is what the clause costs, and it is paid out of the winners, so it never shows up on a single deal's statement.
The common mistake is to compare the co-investment's headline carry with the fund's and book the difference as saving. A co-investor paying 10 per cent deal by deal against a fund charging 20 per cent on a pooled basis has not halved the carry. On the one-winner spread above, 10 per cent deal by deal costs 7.5 million, more than the 7.0 that 20 per cent pooled would cost on the same programme. The saving is smallest in exactly the vintages where it matters, the ones with write-offs. A related mistake is to assume that a no-fee, no-carry co-investment stays that way on follow-on rounds and continuation vehicles; read the terms of every vehicle, not just the first.
Deal-by-deal carry costs carry rate times losses. Compute the effective rate on the whole programme, stress it with a realistic dispersion, and negotiate for netting across vehicles or a programme-level clawback where the sponsor will accept it. The companion files for this book price the fee and carry saving that this clause erodes, and how much worse co-investment deals can be and still beat the fund shows how thin that saving is on reduced terms. For the fund-level equivalent of the same question, see European versus American waterfalls.
Because each co-investment typically sits in its own vehicle with its own terms, and carry is computed on that vehicle alone, with no portfolio to net against and rarely a clawback across vehicles. On five illustrative 10.0 million deals grossing 1.70x, 10 per cent carry costs 4.5 million deal by deal against 3.5 if the same programme were pooled.
Deal-by-deal carry divided by the programme's total profit. With 45.0 million of profit on winners, 10.0 lost on one deal and 10 per cent carry, the sponsor receives 4.5 on a programme profit of 35.0, an effective 12.86 per cent. With the same 1.70x spread as one 8.5x winner and four zeros it is 21.43 per cent.
Yes. Under deal-by-deal carry the winners pay carry even when the losers wipe out the gains. Five illustrative 10.0 million deals at 2.0x, 1.5x, 1.0x, 0.5x and zero return 1.00x gross, yet 10 per cent carry on the two winners costs 1.5 million and the co-investor gets back 0.97x net.
This article is one calculation from The Co-Investment Practitioner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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