Conspiracy theorists who thought general partners were somehow still making out like bandits can rest assured that poor returns and fund size reductions have indeed affected compensation levels.
To be sure, GPs are still earning a good living, earning average total compensation of $693,143 in 2003, according to the recently released Investment Benchmark Report on Private Equity Compensation, compiled by Thomson Venture Economics and Glocap LLC, a private equity-focused recruiting firm. But that’s down more than $100,000, or 15%, from the prior year’s average of $814,167. Bonuses were hit harder than base salaries, as the average dropped to $221,339 from $284,091 during the same time period.
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 average $60,491 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.
“After all else is spent, GPs get what is left over,” says Adam Zoia, founder and senior managing partner with Glocap. “Management fees are getting smaller, which has been making total compensation for senior people consistently shrink since 2000. It is now not uncommon for more junior, non-carrying staff to do more.”
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. “Firms are raising a $2 billion fund, $60 million of it is a management fee, and that is just not enough money, so they are paying junior guys more cash and not giving them any carry.”
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. Firms will have to exit companies to make money. It will take awhile to make real money,” says Vanessa Bailey, a partner with Cressida Partners, a New York-based executive search firm focused on GP level private equity recruiting.
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.
“Carry has not been paid out the way it was expected to for funds of the late 90s,” he says. “Now, for the most part it is just the way primary senior level folks are compensated, but that’s not everywhere.”
Even without carry, making six figures as an analyst doesn’t seem terrible considering just a few years back there were even fewer private equity jobs to be had, but no one is happy. “You are recruited to a $1 billion fund, you should be happy to be there, but it’s like golden handcuffs-it’s hard to leave for a smaller firm that might give carry. Compensation just isn’t what it was,” says Logan.
You Need More Than An MBA
Despite the disappointment over compensation levels, people are still interested in getting into the industry. But recruiters say the only people who have a real 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,” Zoia says. “Out of all MBA programs, only five percent of the class will go into private equity, 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.”
To be sure, Logan says most of the searches he conducts for junior people have had buyout experience. “Firms want better people on the team. The market now is like if the baseball league consolidated and managers had their pick of the best players. But there is no doubt that across the board, firms are selectively hiring even though compensation is flat or worse. Guys in the business are the only ones getting jobs,” he says. “This isn’t an environment where anyone wants to be teaching someone how to do buyouts.”
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’s 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, but a good school. We don’t feel we have the capacity to train these people,” says Kohl. “They have to have directly relevant experience from other buyout firms or an investment banking firm and that is very typical.”
VCs Have More To Complain About
According to the study, 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 has decreased by about 35%, while their private equity counterparts’ total compensation has only decreased about 27 percent.
“Venture capital is doing much worse, they are cutting more aggressively and their future fundraising is much more limited,” Bailey says.
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-industries that produce most venture capital professionals. Additionally, while both industries have been quieter, the venture market has been much more so.
Smaller Funds Mean Fewer Hires
Fundraising certainly factors in the hiring and compensation equation. And as many LPs continues to show an appetite only for names it already owns, the private equity and venture capital job market could become even more competitive. Some of it comes down to sheer numbers, as the next group of funds may not be as large as previous funds.
“There’s no question that total PE employment will shrink in the coming year. The amount of money that was raised in 1999 determines who is working now, so people haven’t been affected too much because they are still feeding off of 1999,” 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.