Adjusting pay expectations

A new compensation survey showing across-the-board reductions in private equity pay indicates that managers may have to lower their bonus expectations to pre-2006 levels for the near future.

The private equity industry received a bit of good news and a bit of bad news this week. First the bad: the new Glocap/Thomson Reuters compensation survey was released and as expected the results were not favorable.
Last year’s survey show salaries and bonuses either rose or showed no decline in 2008 – a too-rosy picture indicating that compensation hadn’t quite felt the impact of the financial crisis. This year, the industry experienced declines across all categories for the first time since the survey began a decade ago. Kevin Ley writes in “Sharing the pain”, private equity fund of funds took the biggest hit, which mainly came out of bonuses rather than base salary. 
The numbers show how quickly private equity professionals have adjusted to the new reality in the industry. As Glocap senior partner Brian Korb said, the momentum of compensation inflation from the boom years of 2006 and 2007 was still leading managers and associates to expect pay increases as late as this spring. But by March when the S&P bottomed out, those same executives were just happy to have a job.
Korb says that the recent compensation reductions represent a reset back to the pre-2006 levels.  But the good news that came out this week may give hope that better times, if not imminent, can at least be seen on the horizon. 
A report by Cambridge Associates showed that private equity returned 4.3 percent in the second quarter, the first quarter of positive returns since the end of 2007 (“Cambridge: Private equity performance up 4.3% in Q2“). The private equity index’s gains were largely the result of improved valuations for companies in several industries hardest hit by the recession, while general partners made about $1.1 billion more capital calls in the second quarter than the first quarter.
However, even this good news should be tempered a bit. The results were similar to a recent State Street report showing that average private equity fund valuations were written up by 5.48 percent in the second quarter. But as a State Street associate pointed out, the surge was more likely a temporary bounce in reaction to the severe write-downs in previous quarters, and another period of declines may be in store before a recovery. 
As such, fund managers should expect to be living in this new “reality” for a while longer.