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.