Family offices that invest directly increasingly pay their teams carry. Its cost depends on the outcome, the catch-up and the pooling, and all three can be priced.
Price it on the vintage it applies to: carry rate times profit, after the hurdle and catch-up, then compare it with the bonus it replaces. On an illustrative 200 vintage of direct deals returning 2.0x over five years, a plan paying the team 10 per cent of profit over an 8 per cent hurdle with full catch-up costs 20.0, or 0.10x, cutting the family's IRR from 14.87 to 13.70 per cent. That is the same cash cost as a 4.0 a year bonus at 2.0x, but nothing at 1.3x and 30.0 at 2.5x.
Worked in full in The Family Office Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A family office that invests directly competes for people with private equity firms that pay carried interest. Many offices answer with a carry plan of their own, often a pool over each year's direct investments. The family's question is what it gives away, and in which outcomes. A carry plan is cheap when the team does badly and expensive when it does well, which is the point of it.
| Input | Value |
|---|---|
| Direct investments made in the vintage | 200 |
| Holding period, years | 5 |
| Gross multiple, base case | 2.0x |
| Carry pool for the team, share of profit | 10% |
| Hurdle, compounded on invested capital | 8% |
| Catch-up | Full |
| Alternative: cash bonus pool, a year | 4.0 |
Carry is pooled across the vintage and paid on realisation. Salaries are a fixed cost under either design and are left out; the comparison is between two ways of paying the variable part.
Hurdle amount = 200 × (1.085 − 1) = 200 × 0.4693 = 93.9
The team earns nothing until profit passes 93.9, a 1.4693x multiple. Then the catch-up gives it all of the next profit until it holds 10 per cent of the total: 10% × 93.9 ÷ 90% = 10.4.
Profit = 400 − 200 = 200, above the hurdle and the catch-up, so carry = 10% × 200 = 20.0
Family net = 380.0, or 1.90x; IRR 14.87% gross, 13.70% net, a drag of 117 bps
In Excel, with invested capital in B2, proceeds in B3, carry rate in B4, hurdle in B5 and years in B6, once the catch-up is complete: =IF(B3-B2>B2*((1+B5)^B6-1)/(1-B4),B4*(B3-B2),"in hurdle or catch-up").
For comparison, the same 2.0x through funds at 2 per cent and 20 per cent costs 20 of fees and 36 of carry, netting 1.72x. A 10 per cent pool is a fraction of what the family would otherwise pay intermediaries; whether a team is worth having at all is the separate question in when direct investing beats funds for a family office.
| Gross multiple | Profit | Carry | Carry, share of profit | Bonus | Bonus, share of profit | Family net, carry | Family net, bonus |
|---|---|---|---|---|---|---|---|
| 1.3x | 60 | 0.0 | 0.0% | 20 | 33.3% | 1.30x | 1.20x |
| 1.5x | 100 | 6.1 | 6.1% | 20 | 20.0% | 1.47x | 1.40x |
| 2.0x | 200 | 20.0 | 10.0% | 20 | 10.0% | 1.90x | 1.90x |
| 2.5x | 300 | 30.0 | 10.0% | 20 | 6.7% | 2.35x | 2.40x |
At the base case the two designs cost the family the same in cash. In present value they do not: at an illustrative 8 per cent, the carry paid at exit is worth 13.6 against 16.0 for the bonus paid every year, so the plan is also the cheaper way to pay the same amount. Below the base case the bonus is the expensive option: at 1.3x the family pays 20 for a vintage that earned 60, a third of the profit, while the carry pays nothing. Above it the carry costs more, 30.0 against 20 at 2.5x, but out of a much larger gain. The family trades a fixed cost for a share of the upside, which is the trade it should want if it believes the team can earn the 2.0x.
| Plan | At 2.0x | At 1.5x |
|---|---|---|
| 10% over 8% hurdle, full catch-up | 20.0 | 6.1 |
| 10%, no hurdle | 20.0 | 10.0 |
| 10% over 8% hurdle, no catch-up | 10.6 | 0.6 |
| 15% over 8% hurdle, full catch-up | 30.0 | 6.1 |
The catch-up matters more than the hurdle. Without it, the team is paid only on profit above 93.9, so the plan costs 10.6 at 2.0x instead of 20.0, and the team receives 5.3 per cent of the profit, just over half the headline 10. With it, the hurdle is only a timing device for good outcomes. Teams negotiate for the catch-up; families that want the hurdle to bite should know that it does not at 2.0x.
Vesting, clawback and what happens to a leaver's carry change who receives the pool, not how big it is. The cost to the family is set by the rate, the hurdle, the catch-up and the pooling.
Paying carry deal by deal. Split the 200 into four deals of 50: two return 3.0x and two 0.5x, so the vintage returns 350, or 1.75x. Pooled, the team earns 15.0. Deal by deal, it earns on the two winners and nothing is netted for the two losers: 20.0, a third more, on a worse vintage than the base case. Many family office plans are written deal by deal because each investment is approved separately; the pooling should follow the vintage, not the approval. The same effect from the investor's side is worked in what deal-by-deal carry costs a co-investor.
A 10 per cent pooled carry plan over an 8 per cent hurdle costs the family 0.10x, or 117 basis points of IRR, on a 2.0x vintage: the same cash as a 4.0 a year bonus, paid later, and nothing in a poor vintage. Pool it by vintage and decide the catch-up deliberately. The Family Office Professional covers how single-family and multi-family offices invest and operate, and the free workbook for the book prices what a family office costs and when it pays.
Plans vary widely; a pool of 5 to 10 per cent of profit on the direct portfolio, often over a hurdle, is one illustrative design. At 10 per cent over an 8 per cent hurdle with full catch-up, the family gives up 20.0 on a 200 vintage returning 2.0x over five years, 0.10x of multiple.
In weak vintages, yes; in strong ones, no. Against a 4.0 a year bonus, 20 in cash over five years, a 10 per cent plan over an 8 per cent hurdle costs nothing at 1.3x, 6.1 at 1.5x, the same 20.0 at 2.0x and 30.0 at 2.5x. The family swaps a fixed cost for a share of upside.
Pooled by vintage, so losses are netted against gains. In a four-deal example with two deals at 3.0x and two at 0.5x, the pooled vintage returns 1.75x and pays 15.0 of carry; deal by deal the team earns 20.0, a third more, because the two losers are ignored.
This article is one calculation from The Family Office Professional. 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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