Those in any segment of the financial industry are no stranger to long hours in the office. However, over the past several years, our Private Equity and Venture Capital Compensation Report found that the total hours worked per week by professionals in this segment of the industry had declined, and in some cases, substantially. In 2014, however, we noted a considerable reversal of this trend, raising questions about what changed and why.
When it came down to the details, we found that 51 percent of respondents to our survey worked at least 70 hours to week. This is a major jump in the number of respondents from this cohort, up from only 20 percent of respondents in the prior year’s survey. However, this data needs to be interpreted carefully, as a slight increase in the number of hours may bump a large percentage of people into another range band in our results. That said, there is a clear increase across the board in the number of hours professionals are spending in the office.
While on the surface some may consider this evidence of a slowing job market, where employees need to work harder to prove their worth, our other data does not support this. Hiring intentions are jump, and fund performance is strong. External data providers, such as Preqin, as indicating investor interest in private equity is improving, not weakening. This leads us to believe that this increase in hours worked may be reflective of positive trends in the industry, with lots of work to do and more deals being closed. The increasing demands on staff will be a positive factor in salary negotiations in coming years, and a tighter labor market with more firms hiring will only contribute to both increased hours in the office and increased salaries.
It’s important to note that those that work the highest hours do not necessarily make the most money per hour worked. In line with previous year’s results, our survey found those working in excess of 90 hours per week made on average $250 per hour, while those at 70 hours per week earned the most, $306 per hour. One important consideration is that hours worked may also reflect one’s position in the organization. Trying to prove oneself as an analyst may require more hours than the work of a Managing Director, even though that too is a demanding role when it comes to office time. These positional differences may account for a portion of the variance we see when it comes to pay per hour worked.
After a year of strong performance in the sector, private equity and venture capital professionals posted some remarkable pay gains in 2014. While the S&P 500 posted a fairly strong total return of 14 percent in 2014, the majority of our respondents indicated their funds were likely to beat these equity benchmarks for the year.
Investors looking for diversification along with higher returns compared to other possible alternative asset classes are increasingly looking to private equity as a solution. According to Preqin, 57 percent of private equity firms said they saw increased investor appetite over the last year, while only 12 percent of firms said they saw reduced interest. In an industry where management fees, based on assets under management, drive the bottom line for firms, the increased amount of capital available is one factor in driving up compensation in the industry. Sustained interest in the segment will continue to allow for improved compensation among top performing firms.
Behind all of this investor interest and new money, of course, is performance. Our survey respondents at private equity and venture capital funds indicated their funds were expected to post stronger returns in 2014 than they did the prior year. At the upper end of the spectrum, 22 percent of respondents indicated their 2014 performance would exceed 25 percent, up 6 percentage points from the prior year. This strong performance is one factor driving compensation higher this year. And in light of increasing volatility in equity markets, the relative stability of private equity returns will be attractive to investors in the coming year.
There is also a correlation between fund performance and bonuses, which comprise a large portion of the total compensation for all finance industry professionals. Our survey results indicated that the strongest performing funds also awarded the largest bonuses to their professionals, as expected. With the highest paid professionals earning sometimes the majority of their compensation through bonuses, fund performance can clearly have a large influence on total compensation payouts.
The coming year looks to be promising for private equity and venture capital firms, and their employees, if performance can be maintained at or near these levels. Increasing equity market volatility will encourage more investors to consider the more stable and long term focused returns consistent with private equity strategies. Firms successful in capturing this investor interest by building their assets under management will likely be the leaders in increasing compensation available to their employees, in order to attract and retain top talent.