Feb 18, 2013 | Performance
Across the financial industry, we’ve seen an overall shift to tying bonuses more closely to the firm’s results for its investors. Whether an investment banker is driving corporate profits for shareholders or a private equity fund manager is beating the benchmark for his clients, this trend remains evident. This was clear in our survey of private equity and venture capital professional, where we saw that respondents in low performing firms were no long expecting large bonus checks, while those in exceptional firms were demanding large payouts. It seems that investors will have to live with the reality cutting both ways, perhaps saving on fees during times of weak performance while expecting to pay more for results that exceed industry averages.
Private Equity and Venture Capital Fund Performance Expected to be Stronger in 2012
The expectations for fund performance were considerably improved in our most recent survey in comparison to the previous year. A very solid 80 percent of respondents expected a positive year for their fund, up from only 73 percent in the year prior. On the negative performance side, only 6 percent of respondents expected their firm to post a lost in 2012, which compares favorably to 9 percent in the year prior. Many funds were expecting outstanding performance as well, with over half of respondents indicating that they expected their fund to return over 10 percent for the year. This would mark a substantial jump over 2011 levels and also would indicate outperformance compared to many alternative asset classes.
Expected Bonuses Generally Follow Fund Performance
In our survey, we noticed that expected bonus payouts for the year generally trended in line with fund performance. For example, for funds that were expected to return between 10 and 25 percent in 2012, the average bonus expectation was approximately $175,000. In a fund where returns were expected to be even, the average incentive payment was predicted to be only in the range of $60,000. The expected payout falls even further once a fund begins to lose value, with the average expected payout for a fund losing greater than 10 percent estimated at only $11,000. This dramatic difference between bonus payouts is indicative of the shift in corporate compensation discussed earlier.
As we continue in an environment with generally low overall returns, fees and performance will become increasingly important for individual and institutional investors alike. Accordingly, compensation is going to be increasingly tied to fund performance, especially at the higher levels of the firm where the large bonuses are paid.
Feb 11, 2013 | Industry
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.
Feb 4, 2013 | Firms
One the major drivers of pay levels in the private equity and venture capital industries is the size of the firm. Firm size has a number of impacts on compensation, from the overall stability of the firm, to level of responsibility assigned to each employee. Generally, larger firms have a more stable client base and therefore more reliable revenue. This allows larger firms to offer more salary based compensation.
On the other side of the equation, in a larger firm, individuals generally operate in specialized roles, without the broad span of responsibilities that those in small firms. The requirement to have a broader business focus and greater responsibility often drives increased compensation demands in smaller firms. The way that small firms meet this demand though is generally through bonus compensation, as their smaller client bases don’t necessarily afford the same level of financial stability to the firm.
Employees at Small Firms saw Higher Compensation in 2012
In 2012, our survey found that the level of compensation within very small firms was increasing at a rate that far outpaced mid-sized and large firms. In past years, compensation had been led by mid-sized firms, offering a balance between span of responsibility and firm financial stability. This year, compensation was led by firms with between one and ten employees. Also interesting was the fact that these small firm employees reported higher salary based earnings than their big firm peers. This may be reflective of small firms recognizing the fact that workload and responsibility is generally greater in small teams, and additional compensation is required in order to retain top talent.
Bonuses were also higher in small firms, but this should come as little surprise as private equity and venture capital firms start to post stronger results. Bonuses are more volatile in small firms due to small revenue bases, and so employees expect to see considerable bonuses in the good years to offset thinner compensation in weak years. The continued strength of the industry should bode well for bonuses amongst small firms in the years to come.
Large Firms may remain most stable
Large firms remain the most stable in providing consistent salary and bonuses to employees. Employees of firms with over 100 staff may not experience the high end bonuses received by small firm employees in good years, but they also don’t have do without during weaker years. Less responsibility and more ability to specialize are also attractive features to some in deciding what firm to work at, and these are qualities that large firms provide. Benefits such as higher vacation are also easier for large firms to deliver, and should be factored into any employment decision.
Jan 21, 2013 | 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.
