Background
The client is an Africa-focused venture capital established to invest in early-stage technology companies and with commitments from a variety of institutional limited partner. The fund’s General Partner (GP) team includes 3 senior partners and 3 junior investment professionals. Initially, carried interest (20% of the fund’s profits) was distributed equally among the senior partners, with no allocation to junior team members. Over time, the junior professionals began to make significant contributions by sourcing high-value deals, managing key portfolio companies, and driving exits. Additionally, one senior partner played a smaller role due to other commitments, creating tensions within the team about the fairness of the existing carry allocation.
The Problem
The existing carry arrangement failed to incentivize junior team members, despite their growing contributions. The existing carry arrangement also failed to reflect actual contributions of senior partners, especially those who were less active and did not create the requisite degree of alignment across the team, risking attrition of key contributors.
Approach
We interviewed senior partners and junior partners separately. We then reviewed and updated the existing carry agreement using a modified carry agreement with a view to adjusting the existing carried interest allocation. Amongst others, the modified carry arrangement featured a base allocation of 50% carry, allocated equally among the three senior partners, reflecting their founding contributions and leadership roles (b) a base allocation equal to 30% of the carry distributed among all team members (senior and junior) based on their contributions to key metrics, such as, deal sourcing, portfolio management and exit execution. Contributions were tracked and evaluated annually by an internal review committee; (c) a discretionary pool of 20% of the carry, held by the fund’s managing partner and allocated on a discretionary basis to reward exceptional performance, attract new talent, or retain key team members. We also introduced vesting terms allowing senior partners to retain immediate vesting for their base allocation, whilst junior team members were subject to a 3-year vesting period, with a 1-year cliff, ensuring alignment with the fund’s long-term goals.
Key Takeaways
We were able to help the client to implement a framework for retaining key talent, improving performance, entrenching, attracting new talent and aligning the value of fairness and transparency, a key value of the client firm. By customising the carry structure, the client was able to align incentives, foster collaboration, and drive performance, ultimately benefiting both the fund and its investors. This highlights the importance of addressing evolving team dynamics and contributions within an investment fund.
