Compensation Levels Not Affected By Lower Returns, Fees –

Private equity shops may be slashing management fees and generating lower returns than in previous years, but such declines have not had a negative impact on base compensation levels for investors.

At least that is the primary finding of a recently published study conducted from Venture Economics (publisher of Buyouts) and Glocap Search LLC, an executive recruitment firm specializing in private equity industry placements. The report, which is largely based on starting salaries of individuals placed by Glocap, found that base compensation levels for private equity pros rose 0.1% from 2001, with the largest jumps occurring in the analyst and associate ranks at buyout and mezzanine firms.

“I don’t think that either the fee cuts or fund cuts have caught up with compensation yet,” said Adam Zoia, founder and senior managing partner of Glocap. “That may come next year, although we’re already seeing a leveling off of salaries, whereas it had been going up for the past few years.”

Total 2002 compensation data is not available in the published report because bonuses have not yet been disbursed. Suffice to say, however, that total compensation levels this time around won’t rise 32% like they did from 2000 to 2001.

“I’ve heard people say that your bonus this year is that you still have a job,” joked Joe Logan, managing director of Pinnacle Executive Search.

Per usual, the compensation study found that buyout and mezzanine investors made out better than their venture peers, although larger firms did not necessarily pay better than smaller firms. Moreover, no correlation was found between a firm’s industry focus and its starting salary levels.

The average starting base salary for a general partner in a buyout or mezzanine firm in 2002 was $650,000, down just slightly from an average of $665,522 in 2001. Principals were down 4% from $224,704 to $215,625, while chief financial and chief operating officers essentially broke even with $194,750 in 2002, compared to $194,556 in 2001.

On the upside, buyout and mezzanine analysts made an average of $69,786 in 2002, up 6.5% from $65,249 the previous year. One possible reason for this bump is that some business school grads are now being forced to accept analyst gigs that used to be the exclusive domain of pre-MBAs.

The study does not specifically address numbers of new hires, although Zoia reports that there has actually been a net increase in hiring among firms that are still in business due to increased workloads. “It takes a lot more man hours to get a deal done because you need to do more extensive due diligence, including more trips to visit the company, more checking with customers, etc.,” he explained. “For some firms, that means they need more people, especially in junior positions.”