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Do your carried interest arrangements deserve a fresh approach?

22 April 2020

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Is your carried interest structuring getting as much attention and visible support as the rest of the remuneration package? Pensions, share plans and bonuses form part of a tried and tested reward package but carried interest plans aren’t as often thought about in the same light.

The structuring of carried interest (carry) is a key focus for investment houses and their advisors alike.

Structuring carry to optimise outcomes for managers and investors, whilst managing complex tax, regulatory and reporting obligations, are areas that can benefit from a specialised  and experienced partner to ensure compliance and visibility.

Performance based remuneration, alignment of interests between managers and investors and incentivising strong and stable results are relevant themes in all employee reward discussions. It’s therefore no surprise that more investment houses are seeking to bring a specialist reward administration team to help manage and implement their carry infrastructures as part of their overall package.

In most jurisdictions, the broader deferred compensation or reward environment is well catered for with specialist share plan, pension plan and funds plan administrators. In contrast, carry is frequently managed in-house, in conjunction with the designated fund administrator. There’s no reason for this to be managed separately and can be part of an investment house’s wider reward scheme administration solution.

Having a dedicated administration resource with a specialist reward skill set allows an investment house to focus on the core business, without the burden of carry administration resting with the investment house’s HR and tax teams, often bundled into a “middle office” solution.

What should your reward administrator offer?

  • Providing the right experts – having a dedicated team of specialists administering carried interest plans means they have the experience in dealing with complex plan set-ups and project management, alongside your in-house specialist(s). Helping manage and coordinate legal paperwork around fund set up for carry holders, admissions, points allocations, processing leavers and other core framework tasks can significantly reduce workload burden and mitigate risk.
    Being able to provide SPV support including entity formation, employee benefit trust (EBT) formation with services and process flows is an additional benefit of an administrator as well as dealing with transfers of unallocated points across each carry plan.
  • Access to market leading technology to view information – having access to a dedicated web platform for carry holders to review all plan details holdings in one place.

Chosen participants can view, at a minimum:

  1. Current carried interest holding data, including the proportion of carry which is vested against what’s un-vested
  2. Co-investment positions held along with drawdowns made over time, in addition to any leveraged positions
  3. Document access and management should be available to carry plan documentation such as Vesting Deed’s and Limited Partnership Agreements, along with member specific documentation of the subscription agreements and FATCA forms, acting as a library for the users.

Importantly, reporting functionality for participants and the investment house coordinators, to include a suite of information such as:

  1. distributions across select plans over any time period specified in a date ranges
  2. participant reports
  3. vesting reports
  4. the full data suite that can be tailored into bespoke reporting to assist with annual tax reporting
  • A flexible reward environment – being able to adapt service offering to deal with managers, HR teams and third-party advisors such as lawyers and tax accountants. A specialised carry administration team will be well versed in working with HR and/or tax and reward teams to manage plan timelines, provide data to support key tasks such as annual employment related securities (ERS) reporting and production of participant geared statements and communications.

Against the backdrop of increased tax authority scrutiny and self-certification along with increasing workloads, pressures and regulations, carry is an area that businesses shouldn’t have to worry about with the right partner by their side.

To discuss any of the items in this article or find out more, please get in touch.