Buyout Compensation

Big Buyouts Cut Compensation, Small Ones Increase

While professionals at large buyout firms still have the best compensation in absolute terms, pay in large private equity firms took the biggest cut year-over-year in 2009. The latest edition of the Private Equity Analyst-Holt Compensation Report categorized firms into large (+$1 bil in assets), medium ($300 mil-$1 bil) and small (below $300 mil).

The big buyout firms are able to attract top talent with very competitive compensation packages (to put it mildly) but now these firms are having to reduce this paycheck while the smaller and mid-level private equity firms are actually increasing compensation. There are a couple different implications: veteran talent may leave private equity to hedge funds (a few funds started hiring again last week) and the surviving investment banks. This opens the door to younger private equity professionals who have been hoping to get into the larger buyout firms and won’t mind the smaller salary than they would have received last year. It’s still about $50k better to work with the big guys than with smaller buyout firms. Another outcome is that the small and medium buyout firms have more leverage for recruiting staff. Now, even a medium-sized private equity firm can entice a candidate saying, “The big firms are cutting pay by 14% while we are increasing ours by 20%.”

Professionals at large buyout firms received a cut of 14% to their overall compensation (salaries, bonuses and carried interest). On the other hand, small and medium-sized private equity firms saw increases in compensation by 4% and 20%, respectively. Yet even with the reduction, large private equity employees still make $368,000 in overall compensation, more than the medium and small buyout firms by more than $50,000.

The cause for this reduction at the bigger firms–besides simply cutting back in a tough market–is that these firms have made their money largely from management fees. This works fine when investors are interested in investing in new funds and, in a good year, limited partners are usually fighting to get access to the latest fund launched by the big buyout firms. In the recession launching new funds has become increasingly difficult from unreasonable valuations, nervous investors, poor returns and limited lending from banks.

“[Private equity firms] realized ‘we can get pretty fat on management fees if we’re double dipping,”said Denise Palmieri, director of client relations at executive search firm Pinnacle Group International. “The important thing was to raise a new fund before residual fees dropped off from old funds. The only way to continue paying your people and continue your happy lifestyle is to raise a new fund.”

But now it appears to be payback time. The larger firms have been disproportionately impacted by the credit crunch, which brought large deals to a halt long before it began affecting smaller deals. That has hurt the size of their funds and how quickly they can raise them. Through June of this year, mega firms had raised a total of $10.2 billion so far this year, down sharply from $36.6 billion raised in the year-ago period.

Source

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