When the loss of carry is a good thing

Like most private equity firms, Huntsman Gay Capital Partners will adopt a 2-and-20 fee structure.

Unlike most private equity firms, the co-founders – industrialist Jon Huntsman and former Bain Capital managing director Robert Gay – will donate their entire carried interest to charity.

The founders have had a lifelong commitment to philanthropy. “Both Bob and John have been very successful, so wealth creation was not their primary reason for starting Huntsman Gay,” says the firm's managing director and chief administrative officer, Judy Frodigh.

“They both knew if they were going to start this fund…they were going to make philanthropy a core piece of what they do,” says Frodigh.

The California-based mid-market buyout firm is investing from its debut fund, Huntsman Gay Capital Partners Fund I, which closed above target on $1.1 billion in July.

While the charity aspect of the fund has been lauded by investors and other market players, the California Public Employees' Retirement System said the bottom line is return on investment. Calpers committed $180 million to the fund.

“Of course we're in favour of doing good as we do well across our portfolio, and have several initiatives of our own that recognise the value of doing good in causes that have a more general benefit to people,” a Calpers spokesperson says. “However, our board's fiduciary duty is to maximise risk-adjusted investment returns for the benefit of beneficiaries, employees and employers who make retirement fund contributions. We hold private equity partners accountable for return on investment. What they do with their proceeds is their concern.”

“You don't invest in a firm because it's donating carry to charity; you invest in a firm because it can make money for you,” says Kelly DePonte, a partner with placement agent Probitas Partners.

“If you're a public pension plan, you have a fiduciary duty to the employees whose pension you are managing to generate the best returns possible for them,” DePonte adds.