What are the odds the carry is zero?
Eight named companies, each with its own power law of exits, and one carry pool split three ways. The average carry per partner is a large number and the most likely carry per partner is zero, and both of those are true at once.
Finance Advanced Monte Carlo Pro engine
After you install, this is the model to open.
What Does Carry Actually Look Like?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
- Mean carry per partner
- $608K the recruiting-deck number
- Median
- $0 no carry at all in 61% of funds
- P90
- $2.17M P99 $4.65M
- Top decile
- 54% of all carry comes from the best run in ten
Eight companies, $12,000,000 invested out of a $15,000,000 fund, and a partnership of three. Each company draws its own exit: nothing 30% of the time, half the money back 15%, the money back 20%, three times 20%, eight times 11%, twenty-five times 4%. That averages 2.755 times per company, so the fund averages about $33,060,000 of proceeds against a hurdle value of $32,383,875, and the carry pool is 20% of whatever is left over.
Click Run and read the carry per partner carefully, because it says two things that are both true. The mean is $607,528. The median is zero. There is no carry at all in 60 of every 100 runs (60.5%). The number in the recruiting conversation is the mean and the number a partner will most likely receive is nothing, and the gap between them is not rounding, it is the shape of the business.
The percentiles fill it in: P75 is $881,075, P90 is $2,167,742 and P99 is $4,651,108, and 54.2% of all the carry this fund produces is earned in the best 10 of every 100 runs. Now the second run, and it is the one that ends the argument about whether a fund needs a big winner. Delete the twenty-five times outcome: set all eight exit distributions to values 0, 0.5, 1, 3, 8 with probabilities 0.30, 0.15, 0.20, 0.24, 0.11, so nothing changes except that the best outcome is now eight times rather than twenty-five.
Rerun. Mean proceeds fall from $33,060,000 to $22,500,000, the chance of no carry rises from 60.5% to 82.4%, and mean carry per partner collapses from $607,528 to $82,828. An outcome that happens to one company in twenty-five carries 86% of the carry in this fund. That is what a power law means, and it is worth seeing as a number rather than hearing as a slogan.
What this model cannot tell you is when. Carry is paid when companies exit, and a fund that gets there in year seven and a fund that gets there in year thirteen look identical here and have very different lives. It also assumes the eight outcomes are independent, and in a concentrated fund they are not. To make it yours, replace the eight names and checks, set the six outcome probabilities from whatever exit data you can get for your stage, and put your own committed capital, preferred return and partner count in the fund block.
The model
It arrives on a tab called Template: Carry Forecast, carrying these columns:
- Invested ($)
- Exit multiple
- Proceeds ($)
with the model computed beside the data:
| Capital invested ($) | 12,000,000 |
| Hurdle value of committed capital at exit ($) | 32,383,875 |
| Total proceeds ($) | 12,000,000 |
| Carry pool ($) | 0 |
| Carry per partner ($) | 0 |
| No carry at all this fund (1 = yes) | 1 |
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- Do overruns or write-offs cost you more?Will the Fee Book Cover the Practice?
- Which invoice should you check before it goes out?Which Invoices Do Not Look Right?
- What is your diversification rule costing you?Which Deals Can We Actually Fund?
- Which of your cost lines are really one risk?Which Two Costs Move Together?
- What does half a point of fee cost the investor?What Fee Does the Fund Need to Clear the Hurdle?
- What gross multiple does the hurdle actually demand?Will the Fund Clear Its Hurdle?
Every model like this one, and the method behind them: Monte Carlo simulation.