Listed private equity funds innovate on pay

Private equity funds' enthusiasm for publicly traded vehicles could pave the way for new forms of remuneration in the sector.

London-based fund CVC Capital, as well as US funds such as Blackstone, Carlyle and Texas Pacific, are all examining the possibility of raising money using publicly listed vehicles, the Financial Times reports today.

Guy Townsend, managing director at search firm Walker Hammill, says the new vehicles could allow private equity employees to be paid in the form of equity or options.

At the moment, most senior private equity employees derive the bulk of their income from 'carried interest', which is based on profits earned from a fund and paid at the end of a fund's life every eight years or so.

Funds like Kohlberg Kravis Roberts and Apollo Capital have already launched publicly listed vehicles. Others, such as Promethean Investments, a UK-focused fund, are listed on the Alternative Investment Market (AIM).

Michael Burt, a principal at Promethean, says being publicly listed has various implications for pay, not least that carried interest is paid more frequently. "You need a different mechanism for paying carry in a listed vehicle," he says. "Unlike a standard private equity fund, listed funds are not designed to end at a certain point in time, only after which carry is paid. Listed funds are evergreen and payments need to reflect that."

At Promethean, Burt says carried interest is paid after each particular deal exit. Under this system, he says it can be possible to receive carry as soon as six months after joining a fund.

"If you join a traditional private equity firm part-way through the lifetime of a fund, you might not get any carry for seven or eight years," he says. "In a listed vehicle, it happens a lot sooner."

Several other listed private equity funds have chosen to remunerate their employees using options, says Burt: "A listing allows you do things a bit differently."