Highlighting the pay discrepancy among LPs

  • A “brain drain” draws LP talent to the private sector
  • Discrepancy between pension, endowment pay levels
  • A long time to rebuild the team at MassPRIM 

Fortune writer Dan Primack pointed this out in a recent column, sister website peHUB noted.

Another recent report,  on Harvard Management Company’s disclosure of compensation for senior investment staff in 2012, showcases another dimension of the variability of such pay. While the CIO of the about $150 billion New York City pension system is pulling in $224,000 a year, the head of alternative investments at Harvard’s $32 billion endowment made about $7.8 million in the calendar year 2012. Jane Mendillo, the president and chief executive officer of Harvard Management Company, made $4.8 million in 2012.

The non-competitive compensation at many public pension funds compared to the managers to whom they commit capital has long been a problem in the private equity industry, and has led to a “brain drain” in private equity public pension talent. There was a rash of veteran private equity LP departures in 2011 and 2012, when some of the biggest names in the LP world moved into the private sector.

The Massachusetts Pension Reserves Investment Management Board, for example, lost its entire senior private equity leadership in 2011 and didn’t fully rebuild the team until this year.

Senior investment officer Wayne Smith, who ran the private equity program for 11 years, left to join Pathway Capital Management. He was followed by senior investment officer Michael Langdon, who left to open Hermes Global Private Equity’s Boston office.

The program earlier this year lost another private equity investment officer, Scott Hutchins, who left to join Solamere Capital (the private equity firm co-founded by Tagg Romney, son of Mitt Romney).

MassPRIM finally last year brought on a new head of private equity, Michael Bailey, and in March announced the hiring of two people to fill out the team: Michael McGirr, senior investment officer, private equity, and Erin McCafferty, investment officer.

New Jersey’s state pension system lost the person who launched its private equity program, Christine Pastore, in 2012. Pastore went on to join Vista Capital Partners. Jason MacDonald, who had worked under Pastore, took on the role of senior portfolio manager, private markets, and has been overseeing the private equity program.

In the absence of competitive pay, this mentor relationship is probably the best way an LP organization can retain institutional memory and keep a private equity program consistent—growing talent in-house. However, even the new talent, after putting in some time running a private equity portfolio, will be tempted by the thought of moving to the private side for some real money. That’s just human nature.

This “brain drain” is a matter of concern for LP private equity programs because of the long life of private equity funds. LPs pledge to lock up their capital for 10 years or more, but in cases of high LP turnover, the person who built the private equity program does not stick around long enough to tend and nurture the portfolio.

New talent is then brought in who may have completely different ideas of what the portfolio should look like, or have no relationship with the existing managers, leading to potential disruptions of the portfolio before it matures.

This also is important in terms of monitoring managers, and understanding the terms of contracts that were signed in the past. The U.S. Securities and Exchange Commission said recently it has found bad behavior or weak controls in more than half of the 150 private equity firms it has examined—signifying perhaps a real need for LPs to keep close watch on how GPs are abiding by their limited partnership agreements.

Ideally, public pensions would bring investment management in-house and pay investment staff compensation more competitive with their private sector counterparts. However, this would require a major political battle with unions, which have fought against high pay for investment staff.

It’s a tough call, but one that has long been needed to help many of the largest private equity programs in the country retain their LP talent.

Chris Witkowsky is editor of peHUB.