Investment professionals from associates on up to partners saw healthy increases in salary and bonus compensation this year, even as fundraising remained relatively tame.
That’s according to the just-published, survey-based 2011-2012 Holt-Thomson Reuters Private Equity and Venture Capital Compensation Report. Partners at North American LBO/growth equity firms earned a median salary and bonus of $540,000 this year (see table, this page). That was up 17 percent from a median of $450,000 last year. Junior professionals also did well. Senior associates earned a median salary and bonus of $225,000 this year, up 19 percent from a median of $183,100 the year before.
Altogether 34 North American LBO/growth equity firms this spring and summer participated in the Holt-Thomson Reuters survey. Along with supplying data about their firm-wide compensation practices (including bonus programs, carried interest programs and co-investment programs), respondents provided detailed information on the compensation packages of more than 1,000 employees working in both investment and non-investment roles. The survey was a joint effort of Thomson Reuters, publisher of Buyouts, and two compensation consultants—Holt Private Equity Consultants and MM&K.
Just what drove salaries and bonuses higher isn’t exactly clear. But firms may still be feeling flush from the gigantic fundraising years of 2007 and 2008, when U.S. buyout and mezzanine firms raised $550 billion. Since buyout funds collect full management fees during their investment periods (typically five or six years long) those vintage-year funds are still throwing off plenty of fees out of which to pay salaries and bonsues. The pick-up in deal pace since 2009 is also translating into transaction and related fees, although over time limited partners have negotiated to keep a bigger and bigger share of those through management fee offsets.
Hiring also appears to be up year over year, a development that can help push compensation higher. Solveigh Marcks, a founder of executive recruitment firm Denali Group, which specializes in vice president, principal and partner-level searches for private equity firms, said her seven-executive team has seen search activity rise by about a third over last year. Marcks sees four main trends behind the surge. Mid-market shops that have recently raised money are staffing up at the junior level to handle the additional work; firms that are moving into debt investing and other ancillary strategies are hiring people with that expertise; firms are adding to their investor relations and fundraising teams in anticipation of raising money in the next few months; and firms are replacing professionals that have left, sometimes following a shift or narrowing in strategy.
According to the survey, nearly one in seven (13 percent) North American LBO/growth equity firms had planned to hire investment professionals at the partner level this year, down from 16 percent the year before (see table, opposite page). Those that did planned to expand their staff by a median of 15 percent. However, more than half (52 percent) of respondents planned to add investment professionals at the non-partner level this year. That was up from 41 percent the year before. Those that did plan to add to their non-partner investment professional ranks planned to expand their ranks by a median of 20 percent.
Bigger Firms Pay Better
Among other findings, the survey did nothing to dispel the notion that the larger firms with more assets under management pay far better than smaller firms. The phenomenon is a source of perennial headaches for limited partners, who worry that firms will try to raise more money than they can deploy effectively.
Take partners at large LBO/growth equity firms with more than $1.5 billion under management. According our survey they earned an average of $858,100 in salary and bonus this year. That’s more than double the average $381,400 that partners at small buyout shops with less than $500 million under management will earn this year. Partners at mid-sized firms, with $500 million to $1.5 billion under management, earned an average of $623,200 this year.
Those numbers also suggest the great incentive that junior professionals have to climb quickly up the ranks. Analysts at large LBO/growth equity firms in our study earned an average of $155,200 in salary and bonus this year, less than 20 percent the figure for partners. One of the questions asked of firms in the study this year was how many years it takes from earning an MBA degree to reach partner or management director. For LBO/growth equity firms in the study the average is nine years.