Headcount turnover treats an associate and a founding partner as the same departure; the two weighted measures show what actually left the firm.
Measure investment team turnover three ways: departures over average headcount, carried interest held by the leavers over total carry, and portfolio value whose deal lead has left. In an illustrative GP with 20 investment professionals, four departures in three years are 6.7 per cent a year by headcount, but the leavers held 36.9 per cent of the carry and led 38.9 per cent of the portfolio's NAV. The first figure looks stable; the other two describe a firm that has lost much of its senior team.
Worked in full in Operational Due Diligence in Private Equity by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A due diligence questionnaire asks for joiners and leavers, and the manager reports a ratio. That ratio counts an associate leaving after two years the same as a founding partner. Junior turnover is normal in private equity, often by design, and it inflates the figure for firms that are perfectly stable at the top. Senior departures are rare, so they barely move it, and they are the ones that matter to an LP who backed a team, signed a key person clause and expects the people who bought the companies to sell them.
The fix is to weight each departure by what left with it: economics, measured by carry points, and responsibility, measured by the portfolio the person led.
| Role | People | Carry points each | Carry points | Left in the window |
|---|---|---|---|---|
| Partner | 4 | 15.000 | 60.0 | 2 |
| Principal | 3 | 6.000 | 18.0 | 1 |
| Vice president | 5 | 3.000 | 15.0 | 0 |
| Associate | 8 | 0.875 | 7.0 | 1 |
| Team | 20 | 100.0 | 4 |
Leavers are replaced, so average headcount stays at 20. The current fund holds 12 companies with a NAV of 900. The two departed partners led 5 of them, worth 350, and sat on an investment committee of 5.
Headcount turnover a year = departures ÷ average headcount ÷ years
Carry-weighted turnover = carry points held by leavers ÷ total carry points
Deal lead turnover = NAV of companies whose lead left ÷ portfolio NAV
Excel, one row per person with points in C and a leaver flag in D: =SUMIF(D2:D21,"yes",C2:C21)/SUM(C2:C21); the same SUMIF on a company list for NAV
| Measure | Calculation | Over three years | A year |
|---|---|---|---|
| Headcount | 4 / 20 | 20.0% | 6.7% |
| Carry-weighted | 36.875 / 100 | 36.9% | 12.3% |
| Deal lead, by NAV | 350 / 900 | 38.9% | |
| Investment committee seats | 2 / 5 | 40% |
The manager can truthfully report 6.7 per cent annual turnover, within any comfortable range. Weighted by carry, the team has lost more than a third of its economics; weighted by responsibility, nearly two fifths of the portfolio has changed hands internally, and two of five investment committee votes belong to new people. Three of the seven partners and principals, 42.9 per cent of the senior team, have left. That is a firm in transition, and the questions it raises are specific: who now leads the five companies, whether the successors have exit experience, and whether the departures triggered or came close to triggering the key person clause.
Points held by leavers are usually reallocated, partly vested or bought back, so carry-weighted turnover is not a measure of what the leavers keep. It measures how much of the incentive structure had to be rebuilt, and it is a useful way to read what a carry point is worth to the people who stay.
| Who left | Headcount, a year | Carry-weighted, total | Carry-weighted, a year |
|---|---|---|---|
| Four associates | 6.7% | 3.5% | 1.2% |
| Two VPs, two associates | 6.7% | 7.8% | 2.6% |
| One partner, three associates | 6.7% | 17.6% | 5.9% |
| Two partners, a principal, an associate | 6.7% | 36.9% | 12.3% |
The headcount ratio is identical in every row; the carry-weighted figure moves by a factor of more than ten. That is the case for asking managers for the leaver list with titles, carry allocations and deal responsibilities, and computing the ratios yourself.
Accepting a turnover ratio computed by the manager over a window it chose. A three-year window ending just before a partner's departure, or a definition that counts only "investment professionals" and leaves out operating partners, can make a team in transition look stable. Ask for every departure since the predecessor fund's final close, with the date, role, carry points and the companies the person led, and compute all three measures over the same period. Then compare the leaver list with the names in the key person clause: departures that fall one short of the trigger are as informative as one that crosses it, which the probability of a key person event puts into numbers.
Turnover is a people risk with an operational edge. Ask, for each departed deal lead, who now sits on the portfolio company board and whether the valuation of that company changed after the handover. A mark that drifts once its sponsor has left is worth a question.
Assessing a manager's people, structure and controls is the book's subject, and the free workbook for this case applies its rating model.
There is no reliable public benchmark, and the headcount figure says little on its own: junior turnover is built into most firms' models, as associates leave for business school or other roles. The useful test is weighted. Four departures out of 20 over three years is 6.7 per cent a year whether they are four associates, 3.5 per cent of the carry, or two partners, 36.9 per cent.
Add up the carried interest points held by people who left during the period and divide by the total points allocated to the team. In the illustration two partners at 15 points, a principal at 6 and an associate at 0.875 held 36.875 of 100 points: 36.9 per cent over three years, 12.3 per cent a year.
Because the person who bought a company usually runs the value creation plan and the exit. In the illustration the two departed partners led 5 of 12 companies, 350 of 900 of NAV, 38.9 per cent. Those holdings now depend on a successor who did not underwrite them, which is a valuation and execution risk the headcount figure hides.
This article is one calculation from Operational Due Diligence in Private Equity. 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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