PE must consider generational differences when approaching carried interest

Private equity must account for a generational difference when it comes to financial incentive schemes, including carried interest and bonus packages.

Speaking at Real Deals and The Drawdown’s HR & Talent Summit 2022, panellists criticised certain aspects of the traditional carried interest scheme and discussed how best to incentivise younger employees.

“Different people want different things, and any incentive schemes need to reflect that,” Charlie Hunt, director of UK at PER, said. “When someone sets up a new fund, it’s quite common for the partners to say ‘everyone gets carry’ as a way of democratising that capital. However, a lot of the younger generation don’t care much for this, partly because they probably aren’t thinking of staying at the firm long term, and partly perhaps they have different priorities — like getting on the property ladder.”

He added that for the younger generation, the “softer perks” are becoming more important, including culture, parental leave and diversity. As such, firms should put more focus on this.

Jason Howard from Headway Capital Partners, added that carried interest can be something of a “millstone around the neck” for the younger generation. He suggested that there needs to be more flexibility on incentive schemes. “I’ve seen a number of hybrid dual structures put in place, which allows employees, if they wish, to see cash on a more regular basis,” he said.

Panellists noted that there is a growing alignment between financial incentives and culture.

Hunt said one example of this is the emerging trend of linking ESG to carried interest, whereby employees won’t receive their carry if the firm doesn’t reach its ESG targets. Another strategy is where part of the carry pool is set aside for good causes, he said.

A more tailored approach to financial incentive schemes is essential to both attracting and retaining talent. As Spencer George from Ontario Teachers’ Pension Plan, said: “We see people coming to us, and leaving us, for carry plans, so it's extremely important to look at how we are incentivising around that.”

This article was originally published on our sister publication Real Deals.