As reported by The Deal, Providence Equity Partners is cutting its carry from 25% to 20% for its upcoming fund, targeted at $12 billion. I haven't posted in my VC Primer series in a while, but I did post previously about The Carry and how some firms such as Bain Capital charge hefty carries of 30%. The 30% carry hasn't been that well received by some LPs who argue that in this day of mega club deals, it doesn't make sense to pay for that extra 5% or 10% for non-proprietary deals. I sense that this move by Providence is an acknowledgment of the competitive marketplace that the buyout world has become.
I have always felt that the carry is the best way to incentivize management to achieve outsized returns. I think the industry standard of 20% or 25% is reasonable. However, if PE managers really want to give back then they should cut back on annual management fees. As megafunds increase in size, these annual dues can mount up.
Don't get me wrong, I am a part of and have significant interests in entities who charge a reasonable management fee. However, these fees should be utilized for operating expenses and to pay managers. It doesn't take $10 mm or $100 mm yearly to run an excellent private equity firm. There are some excellent firms that have very fair management fee plans that use all fees for operating costs and everything in excess gets returned or kept but tallied against the future carry carveout. Perhaps we will see some of these changes as LPs become more "active" investors.
I am glad to see Providence come in line with the industry. Hopefully, LPs will take note and reward those PE firms that are looking out for their LPs best interests.
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