Run the waterfall for the pool, date the payments, discount them and apply vesting: a points offer is a deferred option on the whole fund, not a number.
A carry point, one per cent of a fund's carry pool, is worth the fund's total carried interest divided by 100, received years later and only if you vest. In an illustrative $500m buyout fund returning 2.2 times invested capital gross, the carry pool is $93.60m, so one point is worth $0.936m nominal but about $0.370m today, because nothing is paid until year eight. At 1.6 times gross the same point is worth nothing at all.
Worked in full in Private Equity Investor Relations by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Carry points come up in every senior offer in private equity, investor relations included, and they are usually discussed as if they were a number. They are an option on the fund's performance, paid at the end of a long waterfall, subject to vesting and leaver terms. The calculation below turns a points offer into money, in three steps: the pool, the timing, and the vesting.
| Input | Value |
|---|---|
| Commitments, all drawn by year four | 500 |
| Management fees and expenses over the life | 60 |
| Invested capital | 440 |
| Gross multiple on invested capital | 2.2x |
| Gross proceeds, distributed years four to nine | 968.0 |
| Preferred return, compounded annually | 8% |
| Carried interest, full catch-up, whole-fund waterfall | 20% |
| One carry point | 1% of the pool |
| Discount rate for the individual | 12% |
| Vesting | Straight line over five years |
Contributions run 100, 120, 120, 100 and 60 over years zero to four. Proceeds come back at 10, 15, 20, 25, 20 and 10 per cent in years four to nine.
Step 1: the carry pool. Run the fund through its waterfall. Profit over everything the investors paid in, fees included, is 968.0 − 500 = $468.0m. With the preferred return cleared and a full catch-up, carry is 20 per cent of that: $93.60m. One point is $0.936m.
Value of n points = n × 1% × carry pool, with carry pool = 20% × (proceeds − contributions) only once the catch-up has cleared
Present value = Σ point's carryt ÷ (1 + r)t; vested value = value × share vested
In Excel, with years zero to nine in B1:K1, the yearly carry pool in B10:K10, the discount rate in a cell named Rate and the number of points in Points: =SUMPRODUCT(B10:K10,(1+Rate)^-B1:K1)*Points*1%. Multiply by the vested share last.
Step 2: the timing. The investors are owed their contributions plus 8 per cent a year before any carry is paid. The owed balance is still $7.37m at the end of year seven, after four years of distributions. Carry arrives in year eight ($74.24m, most of it catch-up) and year nine ($19.36m). For one point: $0.742m and $0.194m.
| Year | Gross distribution | Owed to LPs after | Carry pool paid | One point |
|---|---|---|---|---|
| 4 | 96.8 | 498.38 | 0.00 | 0.000 |
| 5 | 145.2 | 393.05 | 0.00 | 0.000 |
| 6 | 193.6 | 230.90 | 0.00 | 0.000 |
| 7 | 242.0 | 7.37 | 0.00 | 0.000 |
| 8 | 193.6 | 0.00 | 74.24 | 0.742 |
| 9 | 96.8 | 0.00 | 19.36 | 0.194 |
| Total | 968.0 | 93.60 | 0.936 |
Step 3: discount and vest. Discounted at 12 per cent from the day the points are granted, the point is worth $0.370m, 39 per cent of its nominal value. If you leave after three years of a five-year vesting schedule and the leaver terms let you keep what has vested, you keep 60 per cent: $0.562m nominal, $0.222m today.
| Points | Nominal | Present value at 12% | Nominal per year of vesting |
|---|---|---|---|
| 1 | 0.936 | 0.370 | 0.187 |
| 3 | 2.808 | 1.109 | 0.562 |
| 5 | 4.680 | 1.848 | 0.936 |
Three points in this fund are worth $2.808m if it performs as modelled, but $1.109m in today's money, received eight and nine years from now. Compared on an annual basis with salary and bonus, three points are a $0.562m a year proposition nominally, and well under half that in present value.
Check what a "point" means before comparing offers. At some firms it is one per cent of the carry pool, as here. At others it is one of the 20 percentage points of carry, which is five times larger: on that definition one point in this fund would be $4.680m.
| Gross multiple | Proceeds | Net multiple to LPs | Carry pool | One point, nominal | One point, PV |
|---|---|---|---|---|---|
| 1.4x | 616.0 | 1.23x | 0.00 | 0.000 | 0.000 |
| 1.6x | 704.0 | 1.41x | 0.00 | 0.000 | 0.000 |
| 1.8x | 792.0 | 1.47x | 58.40 | 0.584 | 0.213 |
| 2.2x | 968.0 | 1.75x | 93.60 | 0.936 | 0.370 |
| 2.6x | 1,144.0 | 2.03x | 128.80 | 1.288 | 0.539 |
| 3.0x | 1,320.0 | 2.31x | 164.00 | 1.640 | 0.692 |
Carry is a cliff, not a slope. At 1.6 times gross the fund returns $204.0m of profit and still pays no carry, because over this timing the 8 per cent preferred return absorbs it. Between 1.6 and 1.8 times the catch-up switches on and the point jumps from nothing to $0.584m. Above that, each extra 0.4 turns of gross multiple adds about $0.35m per point. When and why carry switches on is worked in at what multiple a fund starts paying carry.
The rule of thumb that a fund which doubles pays carry of 20 per cent of its size gives $1.000m per point here, close to the $0.936m nominal figure but more than two and a half times the $0.370m present value. The mistake is not the pool, it is ignoring time and vesting: a point is paid late, in a lump, conditional on the whole fund. Value it as you would any deferred, contingent payment, and ask for the fund's realistic gross multiple and distribution timing before comparing it with cash.
To value carry points: run the waterfall for the carry pool, take your share, date the payments, discount them, and apply vesting and leaver terms. Then rerun it at a weaker multiple, because the downside is zero, not a smaller number. The fund-level measures that drive the pool, and how investors read them, are in the free workbook for this case and in six ways to state the same fund's return.
Under a whole-fund waterfall, only after investors have received all their contributions and the preferred return, so typically late in the fund's life. In the illustrative $500m fund, investors are still owed $7.37m at the end of year seven, and the carry arrives in years eight and nine: $74.24m and $19.36m. Discounting that delay at 12 per cent cuts a point's value to 39 per cent of nominal.
It depends on the vesting schedule and the leaver terms. On straight-line five-year vesting, a good leaver after three years typically keeps 60 per cent: in the illustrative fund, $0.562m of a point's $0.936m nominal value, or $0.222m in present value. Bad leaver clauses can forfeit vested carry too, so read them before valuing an offer.
Definitions differ by firm. Most often a point is one per cent of the carry pool, so 100 points make up the whole pool. Some firms instead count the 20 percentage points of carry, making each point a twentieth of the pool. In the illustrative fund that is the difference between $0.936m and $4.680m per point.
This article is one calculation from Private Equity Investor Relations. 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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