Conspiracy theorists who thought GPs were somehow still making out like bandits can rest easy in the fact that poor returns and fund size reductions have indeed affected compensation levels.
To be sure, GPs are still making a good living, earning an average of $693,143 in total compensation in 2003. But that’s down nearly $125,000, or 15%, from the prior year’s average of $814,167, according to the recently released Investment Benchmark Report on Private Equity Compensation. Glocap LLC, a private equity-focused recruiting firm, and Thomson Venture Economics (publisher of PE Week), compiled the report.
The study also found GP suffered a hit on their bonuses, as the average dropped to $221,339 from $284,091 last year.
Conversely, bonuses and base salaries are on the rise for analysts, associates and senior associates. In 2003, a senior associate will earn an average bonus of $71,231, a 15% increase over the $60,491 average in 2002. Associates will take home an average bonus of $65,429 this year, compared with the average bonus of $58,286 last year. And the average analyst’s bonus is expected to be $38,191, a 12% increase over last year’s $33,927.
Adam Zoia, founder and senior managing partner with Glocap. Says the problems stem from the shrinking of management fees, which in turn makes total compensation for senior people consistently smaller since 2000. It is now not uncommon for more junior, non-carrying staff to do more and get paid more, he says.
“GPs then get what is left over after all else is spent,” Zoia says.
The rub, however, lies in the fact that an increasing number of private equity firms aren’t letting their junior pros participate in the carry. “People at Bain and Blackstone are still getting paid well even if it is less, but there is not a lot of opportunity for carry. There is just no room for it,” says Joe Logan, a managing director with Pinnacle Group International.
Recruiters say this isn’t likely to change anytime soon. “Junior people will have to adjust to the fact they may not get carry for a while. These are the post-MBA up-to-three-years-in-the-business people. They will have to learn the old fashioned way,” says Vanessa Bailey, a partner with Cressida Partners, a New York-based executive search firm focused on GP level private equity recruiting. “Firms will have to exit companies to make money. It will take awhile to make real money.”
But not all firms are stiffing their junior pros. Stewart Kohl, a managing partner with Riverside Co., agrees that while carry isn’t adding up to what it used to be, that shouldn’t prevent junior pros from sharing in the spoils. Riverside offers carry to everyone from the top investors to the receptionists who answer the telephone.
Despite the mixed bag over compensation levels, people are still clamoring to get into the industry. But recruiters say the only people who have a shot at a job right now are post-MBA entrants who worked in private equity prior to entering an MBA program. First of all, there is a much larger pool of candidates that have experience, as most post MBA grads worked in private equity before school.
“Out of all MBA programs, only five percent of the class will go into private equity,” Zoia says. “But there are enough good candidates that PE firms can be choosy, and they aren’t going to look at anyone now that has no experience.”
The study shows a significant jump in compensation to graduates of Ivy League schools versus other institutions. Analysts that graduated from an Ivy League program earned a total compensation of $113,228, compared to $94,148 for analysts that went to non-Ivy-League schools. Associates with Ivy League MBA educations will earn $153,667 this year, while their non-Ivy-League counterparts will earn $121,846.
“We’re not looking to hire at all, but if we were, the person would have to have experience and be from a top school,” says one buyout pro. “There are a lot of people out there that have gone to a top school and do have experience, so why start from scratch?”
At Riverside, the story is more or less the same.
“We hire MBAs from good schools, it doesn’t have to be an Ivy League,” Kohl says. “But they have to have directly relevant experience from other buyout firms or an investment banking firm and that is very typical.”
The study also reports that venture capitalists’ compensation is down across the board. On average private equity general partners will be compensated with $100,000 more than venture partners this year. Since 2000, venture partners’ total compensation decreased by about 35%, while their private equity counterparts have seen their total compensation decrease about 27%.
“Venture capital is doing much worse, they are cutting more aggressively and their future fundraising is much more limited,” says Bailey from Cressida Partners.
There are a couple of reasons for the discrepancy. First, buyouts funds typically have larger management fees because, on average, they have more capital under management than venture funds. The other reason is that most investment professionals from buyout funds come from the investment banking industry, where cash compensation is higher than that of the consulting and technology-industries that produce most venture capital professionals.
Fundraising certainly factors in the hiring and compensation equation. And as many LPs continue to show an appetite only for names it already owns, the private equity and venture capital job market could become even more competitive.
“There’s no question that total PE employment will shrink in the coming year,” Zoia says. “The group of funds to be raised next is going to be smaller, so compensation is going to go way down or less people are going to be working in the industry. It is definitely more likely there will be a head count reduction than professionals accepting less compensation. They are already upset about it now.”
One buyout partner says firms are indeed going to be employing fewer professionals. “The difficulty is that there’s not many jobs out there and firms are downsizing. Generally, funds hire when they’re raising a new, big fund. Without that type of fundraising happening, there hasn’t been much hiring,” he says.
This story originally appeared in Buyouts, a related publication.