One of the biggest draw cards to working in the private equity industry is often the large salaries on offer, with average compensation exceeding the $200,000 mark. However, the big compensation offered can often make it difficult to break into the industry, particularly with the top firms and largest funds.
One of the most common questions for those within the private equity industry is ‘Is it really worth the effort to work for larger funds?’. Before you decide to pursue the greater responsibilities and challenges of large funds, you need to identify the value to your career and to your bank account.
After thoroughly researching private equity remuneration, we found that fund size has the ability to affect your pay substantially. No matter where you are in your private equity career, the good news is that working with a larger fund will dramatically boost your salary.
Here are some highlights from the 2012 Private Equity Compensation report:
For those in the earlier stages of their private equity career, fund size doubled compensation.
- Analysts working with large funds (over US$500 mil) received over 89% more compensation than those working with small funds (under US $100 mil)
- Associates working with large funds (over US$500 mil) received 100% more compensation than those with small funds (under US $100 mil) – double the salary of an associate with a small fund
However, the effects of fund size on compensation aren’t just beneficial for analysts and associates. Salary increases were still considerable for all positions in the typical private equity firm:
- Senior associates with large funds had 63% higher salaries than those who worked with small funds (under US $100 mil)
- Directors had a significant pay jump of over 67% when working with a large fund (over US$500 mil), compared to directors working with small funds
- Vice presidents have the biggest increase in compensation: a 191.66% rise in salary
If a higher salary is what you’re looking to achieve, a strategic career move to a larger fund will help you reach your compensation goal. While there will undoubtedly be greater responsibilities associated with the pay increase, working with larger funds will help your bank account, as well as your career by assisting you to develop your skills.
The private equity industry in the United States seems to be reaching maturity, as many new firms launch stabilized, ready-to-invest capital in the billions of dollars (nicknamed “dry powder”).
Fund-raising activity has continued through 2011, as smaller funds do most of the fundraising activity despite the fact that larger funds picked up most of the capital available. This demonstrates the imbalance in the private equity industry, with the average private equity firm on their first or second fund, typically with fund sizes of less than $500 million.
The days of focusing on financial engineering to the detriment of operational improvements are now over. The new focus of the typical firm is on cutting costs and increasing portfolio revenues. For private equity professionals, this means that operational management skill sets are increasingly in demand.
What These Changes Mean for Your Compensation
Now that the industry is maturing, private equity professionals can expect some positive changes to their compensation packages. Our research has indicated an optimistic outlook for salary and bonus increases, with most private equity and VC professionals experiencing a solid level of earnings in 2011.
Compensation for almost every level of professional, from employee to partner, has increased, with many benefiting from double-digit increases in compensation. The annual average compensation for private equity and VC professionals increased 6 percent to $248,000 USD.
What to Expect at Smaller Firms
The trend towards higher compensation is benefiting employees at firms of every size. For smaller firms (less than 25 employees), total compensation has also increased dramatically. As larger firms pick up their hiring, smaller firms have needed to adjust their remuneration packages or risk losing talent.
Salary Increases in 2012 and Beyond
The good news for private equity professionals continues: We expect that these trends will continue to increase total compensation throughout 2012. More than 40% even expect double-digit increases, with most professionals looking forward to a pay rise of some sort this year. While not all workers are expecting a pay rise, these trends are helping to stabilize the industry and provide an overall highly positive outlook for the future.
Professionals looking to advance their private equity careers are often advised to earn an MBA degree. An MBA is often considered essential to business success in the real world, with many professionals feeling the pressure to complete one for better careers success.
However, an MBA is a significant investment in terms of financial cost, time, and effort. With an MBA degree typically taking up to two years of full-time study, it’s critical to first analyze how much it will really help your career and compensation.
Will an MBA increase your total compensation?
Our 2012 Private Equity Compensation Report research found that while MBAs are an advantage, the pay difference is not significant. Particularly for those with over 5 years experience, an MBA certainly does not guarantee better compensation.
In 2011, MBA’s earned 13% more in base salary on average, but received no higher bonuses than those who didn’t have the degree. With the average annual compensation for private equity and VC professionals currently at US$248,000, this equates to a pay difference of roughly $32,240. Compared to the cost of earning a MBA, this may not make the degree as attractive an option for private equity professionals.
While having a MBA can be helpful in the long-term, it can also hurt your chances at new opportunities or pay rises, if your degree isn’t from a top business school. Seth Levine, a top venture capitalist, believes that going to a non top-10 business school will actually hurt your career.
According to Levine, “I know of several firms that simply won’t even consider associate candidates that haven’t attended a very short list of topic schools. In fact, going to a non-top 10 business school could actually hurt your chances vs. not going at all.”
Alternatives to increase your compensation
Considering the two years of lost experience and the cost of the degree, obtaining a MBA may not be the best move for your private equity career. If you’re simply looking for a higher paycheck, an MBA may not be the answer. Instead of turning to an MBA to advance your salary, our research found that compensation was influenced more by fund size, firm type, experience, and job title, among other factors.
Carried interest, often known simply as ‘carry’, is an incentive provided to private equity fund managers to ensure their interests are aligned with investors. Rewarded to fund managers on top of their management fees, carry is a percentage of the fund’s profits and plays a big role in private equity compensation.
On average, carry is about 20% of the fund’s profits. However, this can range up to as high as 50%, or way down to below 10% of the fund’s profits. With increasing competition from different firms to attract investor capita, carry is often decreasing as fund managers try to outdo each other to win investment.
While this general concept applies across the industry, it’s important to note that there are many different carry structures with varying complexity. More established firms with a good investment history have more favorable carry structures, while newer firms are often at a disadvantage.
Why is carry received by fund managers?
With the amount of work required to turn an investment into profit, it’s believed that carry is justified on top of management fees. Before investing, due diligence requires significant analysis, among other work. Once capital is invested in a company, fund managers must get involved in business operations and strategy, restructuring, and business development to make the most of their fund’s investment and maximize profitability.
How often is carry rewarded?
To encourage long-term profitability, investors prefer multi-year vesting periods. Typically, carry will be vested for 3-4 years, ranging anywhere from 1 year to 6 years in rare cases.
Who receives a share of carry?
Private equity firms often share carry between current teams, and old or existing owners. Retired partners also receive carry after their equity is bought or when they retire.
Among the current team, who receives a share of carry comes down to the years of experience of an employee. Only 14% of private equity professionals with less than 2 years experience will receive carry, compared to 70% of those with 20+ years experience. The majority of private equity professionals with at least six years of work experience have some level of carry as part of their compensation package, making it essential to fully understand how carried interest can boost your remuneration.
Carried interest is an important concept in the private equity industry, with plenty of potential to increase your compensation and rewards. While carry varies between funds and firms, it’s essential to understand how it works to ensure your compensation is fair.