Coming off several consecutive years of compensation growth, the private equity and venture capital industry is poised for continued prosperity, both for firms and for employees. Following strong earnings growth in 2012 and 2011, salaries continued to climb in 2013, posting remarkable gains. Even more encouraging, most employees in the industry expect the trend to continue in 2014, as increased investor demand drives the industry forward.
According to the Wall Street Journal, institutional investors are coming back to the private equity industry in a great wave, with nearly $217 billion in new funds for 2013 in the U.S. alone. This represents a 15 percent increase over 2012 fundraising levels, led primarily by buyout firms but also with great support from distressed debt and turnaround funds.
While equity markets posted strong returns in 2013, the lack of attractive returns through diversification in debt markets is perhaps one cause for the shift towards private equity. Many portfolio managers and large investors seeking higher returns from asset classes with less correlation with broader equity markets are taking a long look at private equity.
And fortunately for employees of private equity firms, the success of the industry is resulting in larger personal bank accounts as well, according to the 2014 Private Equity and Venture Capital Compensation Report. The vast majority of industry professionals had expected their 2013 earnings to exceed their 2012 pay, with 62 percent reporting an expected increase in their 2013 take home pay. In some cases, this increase was substantial, with a full 31 percent of respondents expecting an increase over 16 percent. On the flip side, only 5 percent of respondents expected to take home less in 2013, dropping from 8 percent in the prior year.
Even in an industry known for large bonus payouts, increasingly private equity compensation is coming in the form of bonuses. Over 39 percent of total compensation in 2013 came from incentives, up from 36 percent in the prior year. This reflects a growing trend in the broader financial industry towards more closely linking compensation with fund performance.
As the industry continues to raise funds at an ever more frantic pace, the opportunity for continued compensation growth will remain. Continued record low interest rates will provide a catalyst for further transfers into the alternative asset segment, and private equity is well position to be a leader in taking up that demand, particularly from institutional clients. Along with the rapid growth in assets under management will come a similar pace of growth in private equity salaries. Accordingly, the future outlook remains bright for professionals in the private equity industry.
The outlook for employment in the private equity and venture capital industry is quite bullish for the coming year according the results of our 2013 compensation report. As the industry ramps up in the wake of stronger economic fundaments around the world, firms are increasingly looking at adding new talent to their ranks, essentially showing increased hiring intentions in all disciplines. Whether one is looking to enter the industry for the first time, or perhaps move to a new firm for different opportunities, 2013 is shaping up to be a good year to execute on those plans.
Overall, we found a considerable increase in hiring intentions in both private equity and venture capital firms for the coming year. According to our respondents, 59 percent of firms will be looking at add new investment professionals and support staff this year. This is up sharply from only 37 percent last year. This reflects the strength of both private equity and venture capital as the global economy finally begins to sputter forward.
It is also important to note that this remarkably strong level of hiring intentions is not to be found throughout the financial industry, where many segments, such as investment banking for example, continue to struggle for grow their revenues in order to support the addition of new staff. Private equity and venture capital continue to offer a relative haven within the over industry, providing opportunity for many financial professionals that are struggling to gain traction in other segments that are on the decline.
Hiring intentions weren’t the only positive development that our survey picked up this year. We also found a considerable reduction in firms that are looking to reduce headcount this year, with only 2 percent of firms are looking to employ fewer financial professionals in 2013. This is an important trend as employees in the industry are concerned about firms increasingly seeking efficiencies and implementing technological solutions that could allow the firm to operate with a smaller staff. These results imply that any gains in efficiency are quickly being offset by business growth.
The strength of hiring intentions depends on which skillset an employee is bringing to the firm. The most in demand skillset, unsurprisingly, is investment professionals. Also in demand are accounting, operations and portfolio management professionals. According to our survey, firms are looking less often in 2013 for those with skills in IT and investor relations.
When it comes to compensation differences between private equity and venture capital firms, our survey found some interesting trends. In 2012, financial professionals were much better off, on average, in terms of compensation when working for a private equity firm than for a venture capital firm.
Differences were most noticeable at the top of the corporate ladder. At the principal level, an individual working in private equity could expect to earn approximately $450,000 a year, while his peer in venture capital would expect, on average, approximately $210,000 per year in total compensation. At the managing director level, the same trend was apparent, with the private equity employee earning about $200,000 more per year on average than a comparable individual in venture capital. Even at the lower levels within the organizations, compensation differences were certainly visible. At the associate level, the private equity employee could expect to earn approximately $30,000 more per year than a comparable employee working in the venture capital space. The gap declined substantially at the senior associate level, however, and then began to increase again as we surveyed the more senior ranks.
At both the top and bottom of the organizations, those working in firms that handled both private equity and venture capital type activities tended to be compensated more in line with the higher paid private equity employees. This is not unexpected, as most firms that operate in both spaces would generally describe themselves as a private equity manager first, with venture capital activities providing a secondary role.
In both private equity and venture capital, we did see increases in year over year total compensation, primarily related to bonuses. This reflects an overall shift within the financial industry to more performance based compensation, more closely aligning firm results with the results of investors.
Reason for Differences may relate to Firm Size, Location
The reason for these differences is unclear, but there are a few reasonable hypothesises available. First, private equity firms tend to be larger in size, and elsewhere in our survey, we found those working for larger firms to be paid more than those working in smaller outfits. In addition, private equity firms are, in general, more likely to be located in traditional financial regions such as New York, which generally have higher costs of living and therefore higher expected compensation. While these reasons are certainly not conclusive, they may provide some hints to what drives the compensation gap.
Increases in compensation on a relative basis in the private equity and venture capital industries were fairly similar across the board in 2012, regardless of an individual’s position within the firm. According to our survey all employees, regardless of job title, saw an average increase in pay over the last year. While clearly increases would be nominally larger for those at the top of an organization, as a percentage of 2011 pay we saw fairly even distribution amongst most roles within our surveyed private equity and venture capital organizations.
Managing Partners see the Biggest Jump
The one major exception in our report was Managing Partners, who saw the biggest increase in compensation in 2012. Interestingly, this job title was the segment that saw the largest decrease in 2011, indicating the highly variable nature of pay in this role. In private equity and venture capital, these roles are compensated primarily through incentive pay which fluctuates alongside firm performance, which explains the substantial shift year to year. It’s an important reminder that while those at the top levels of an organization do earn exceptional compensation, it’s far from reliable in times of performance volatility.
Chief Financial Officers also beat the Average
Another role in which we saw a higher than average increase in pay was Chief Financial Officers. This change in pay likely reflects the growing regulatory burden placed upon hedge funds. For most jurisdictions today, Chief Financial Officers bare personal financial and legal responsibility for the financial reporting of their firms. As a result, individuals in these roles are demanding higher pay in order to compensate for their personal risk.
In addition to the added personal liability of the CFO role, the increasing regulatory and financial reporting burden itself is adding considerably to workload as well as staffing levels in terms of direct reports, which also warrants a higher level of compensation.
Outlook for 2013 Remains Positive
Our survey found that the majority of respondents, again across the organization, felt that the trend towards higher compensation would continue in 2013. With private equity and venture capital remaining a “go-to” choice for institutional and high net worth investors, these expectations are very reasonable. As the sector continues to expand, the demand for highly experienced professionals with direct experience will grow along with it, driving compensation higher. Whether you’re an analyst or an executive, you’ll stand to gain from the overall strength of the industry.
Last year was certainly a lucrative one for those employed in both the private equity and venture capital industry, where we saw a substantial increase in optimism surrounding compensation in 2012. In fact, 62 percent of those employed in the industry were predicting higher total compensation for 2012 compared to their 2011 earnings. This is a large jump from the level of optimism we saw in the previous survey, where only 46 percent of individuals were expecting an increase in their compensation. In fact, it was such a lucrative year for professionals in the industry that nearly 50 percent saw an increase in their pay of more than 10 percent.
While much of the financial industry is facing consolidation, layoffs and compensation freezes, the private equity and venture capital industries have remained fairly resilient over the past several years. We’ve even seen increased hiring intentions from the majority of firms we surveyed. As competition heats up for talented and experienced professionals, compensation within this industry should continue to climb.
In a study conducted in early 2012, EisnerAmper found that 37 percent of private equity firms were looking to hire, while only 7 percent were looking to slash staffing levels. This contrasts dramatically with investment banking, where the vast majority of large firms are reducing their headcount. Some of the increase in private equity and venture capital hiring comes from increased regulatory compliance, something that these firms certainly did not have to focus on as extensively in prior years. Our numbers show even stronger hiring intentions as last year came to a close, indicative of a strong 2013 ahead.
When this year does open with some promise, we may not see as dramatic an increase in compensation in these industries as we would be expecting. While there may be many openings, there is also a large candidate pool as many professionals from investment banking or other depressed financial sectors look for new opportunities. While highly experienced private equity professionals will certainly see financial rewards due to the expansion of the industry, those will less experience will be competing against refugees from the investment banking industry. This may weigh slightly on compensation, but likely only for lesser experienced professionals.
As 2013 shapes up to be another positive year for the private equity industry, we can expect to see the positive trend continue in the coming months. More professionals will be expecting compensation increases as competition heats up for their valuable skill sets. As long as the private equity and venture capital industries can maintain their value proposition to individual and institutional investors in this time of low yields and high volatility, the employment picture should remain bright.
The 2013 Private Equity and Venture Capital Compensation Report demonstrates that the private equity and venture capital markets are continuing to enjoy increases in compensation and that 2013 will bring additional compensation increases.
Less Focus on Financial Engineering
Years ago, the upside in private equity was achieved primarily through financial leverage… LBO’s were the key to return on investment. Today, with aging portfolios, firm’s are focusing on the long term success of portfolio companies. Firms are assembling appropriate capital structures and teams to execute a long term growth plan.
Deal structure is only the beginning. The combination of cost savings from operational improvements and increased top line performance result in tremendous margin growth and increases in company value.
Good Times for Private Equity
It seems this new focus in private equity has resulted in a competitive market for talented investment professionals. More than half of respondents expected their cash compensation to increase over last year, and more than 40 percent expected to wrap the year end with double digit increases.
Private equity professionals reported increases in both base and bonus compensation. The average professional earned over $270,000. Bonuses comprised over one third of this year’s mean cash compensation, with the highest earners realizing bonuses that made up more than 60 percent of their total cash compensation.
This year, even professionals at small firms reported higher base and bonus compensation. This is likely due to the new competition for these talented professionals.
Romney Raised Awareness of Private Equity
The 2012 presidential election brought with it discussion about the value of private equity in terms of its contribution to job growth and overall economic benefit. Despite democrats trying to paint private equity firms as single-minded entities willing destroy companies in effort to maximize return on investment, the reality is that these firms focus on growth, benefiting both the shareholders and employees.
The industry is performing well and has a positive outlook for 2013 and beyond. Professionals will continue to see healthy increases in base salary and, as long as portfolio companies continue to grow, bonuses will follow suit.
About The Report
The 2013 Private Equity Compensation Report is based on an industry survey conducted in October and November 2012. Data was collected directly from hundreds of private equity and venture capital partners and employees. The full report can be found at http://www.PrivateEquityCompensation.com
The Report has grown to be the most comprehensive benchmark for private equity and venture capital compensation practices. Some of the participating firms over the years include: Actis, American Capital, Bain Capital, Battery Ventures, BlackRock, Carlyle, Century Capital Management, Cerberus, Comcast Ventures, DuPont Capital Management, EdgeStone Capital Partners, GE, Highland Capital Partners, Hilco Consumer Capital, Intel Capital, Mission Ventures, Mohr Davidow Ventures, North Atlantic Capital, RBS, Safeguard Scientifics, SV Life Sciences, Siemens Venture Capital, and Wellington Partners.