Positive Carry

And finance Allah shmoop What is Carrie shmoop Ah the

Holy Grail The warmth of the wealth The golden ring

worth fighting for That's what it is Partners in an

investment firm who get quote kari unquote for their investing

efforts essentially carry out of the office loads and loads

and loads of dough Well how does this magic happen

Well here's the math explanation You're one of three partners

at Joe Bob and Sill Ease Venture Capital Shop You

have five hundred million bucks under management under a two

and twenty five structure That is you get two per

cent of that money per year as fees just kind

of managed company And then you also get twenty five

percent of profits from that fund Those profits are your

carry questions How do you calculate them Yourjob to invest

that five hundred million dollars and make money for your

shareholders Your limited partners as they're called and you three

here are the general partners so you go along investing

and you take ten mil a year in fees and

that two percent of the five hundred mill and those

fees cover the salaries and small bonuses to the dozen

or so junior partners you have all Stanford MBA is

running around like chickens with their heads cut off squawking

for hot deals and cold calling CEOs of private companies

They bring you those deals and you say yea or

nay The two percent of your fee also covers you

know secretaries and rent and insurance and travel and conference

going in lawyers in an end So five years go

by and you've taken out ten mil a year in

fees each year for a total of fifty million dollars

As you've invested the remaining four hundred fifty million dollars

right you made eighty investments total Fifty of them went

totally bankrupt On twenty of them You got your money

back and on ten you made an average of while

twenty times your money or thereabouts Not all of the

investments were the same amounts but the result was that

on your four hundred fifty million dollars of actual infesting

you turned that money into two billion dollars When those

hot cos you funded early in their existence went public

in a night Pio and then six months and a

week later you distributed the shares you had in them

so the profit calculation is based on the original five

hundred million You Ray's not the fifty million of expenses

you had while administering the fund So on exactly two

billion dollars of realized profits you had one point five

billion dollars of profits Meaning you sit behind that fifty

million and expenses that's on you baby And no in

the venture capital world ofthe most nobody cares whether it

took you three years or six years or twenty years

to make those profits There is oddly little attention paid

to the time value of money in that world at

least in Silicon Valley So on that one point five

billion dollars your Carrie was twenty five percent or three

hundred seventy five million dollars You split it three ways

with your partners and each of you takes out a

cool hundred twenty five mil Even cooler you have likely

raised a new fund every two or three years So

you get these waves of dough coming in every few

years at least regularly And then after enough years of

doing this business while you get to buy one of

these yeah that's Carrie