Despite the recent slowdown in the number of private equity deals during the current financial crisis, a new report shows that salaries and bonuses across a number of categories in the US private equity industry either rose or showed no decline in 2008.
The report released in October by executive search firm Glocap Search and information company Thomson Reuters analyzed base salary and bonus compensation for thousands of professionals at fund of funds and firms involved in growth equity, venture capital and private equity from 2005 to 2009.
Among its findings were that bonuses for associates at venture capital firms with more than $2 billion in assets rose 6 percent. The report also showed that buyout firms with $5 billion or more in assets pay senior associates an average annual salary of $435,000, a 4 percent increase from 2007. Meanwhile, vice presidents at the largest fund of funds saw their bonuses grow by 8 percent for the year.
Glocap senior partner Brian Kolb said that such numbers were driven by a trifecta of factors affecting the industry in the last few years, including the high demand for talented junior candidates with deal and finance expertise.
“Compensation was a pretty fast-moving locomotive for 2006 and 2007 going into 2008; there was a lot of money raised, a lot of deals getting done and a lot of competition among funds and also from hedge funds for similar talent,” he said. “The story for this year is deceleration. We saw in the past some double-digit increases, but those have been pared back to low single-digit increases.”
While deal making may have slowed of late, private equity associates have also benefitted from the strong fundraising numbers from most of 2008 and the record capital inflows of 2007, which have allowed funds to maintain or increase compensation levels. Late stage private equity buyout funds paid the highest compensation, followed by venture capital and fund of funds.
However, Korb stresses that such increases can be deceiving if an associate's cash and bonus compensation were raised but carry compensation like stock options take a hit. “Carry is still how a lot of wealth is generated in this business,” he said. Although the report showed that cash compensation had increased earlier this year, Korb says that due to the uncertainty in the industry people are still feeling less wealthy.
But although private equity executives have avoided the kinds of cutbacks affecting other areas of the financial sector, Korb noted in the report that funds are likely to be more conservative in structuring packages and considering promotions in the future. A previous reports released by Glocap in September showed that hedge fund managers are planning on cutting employee bonuses in December in anticipation of tougher times in 2009.
Korb says in the current market firms will rely on such data when planning and budgeting in order to get an idea what other competitors are paying. “If a fund for instance is looking to make an offer tomorrow or forming a budget for 2009, they want to know what is being paid in real time as opposed to survey data from the past,” he said.