The pay divide

As large buyout funds grow ever more outsized, so the compensation gap with smaller funds continues to widen, finds a survey of the UK market.

The size of funds under management is the major factor influencing base salaries and bonuses in the UK private equity industry, a new report has found.

The Private Equity Salary Survey was commissioned by Mergermarket, the M&A database, and Private Equity Recruitment Limited (PER), the London-based executive search firm.

The results of 160 telephone conversations with UK-based private equity professionals showed that in funds with more than £500 million (€726 million; $920 million) under management, approximately 25 percent of the team have base salaries in excess of £150,000 per annum, compared with around 10 percent for funds with less than £500 million under management.

The dichotomy between pay expectations in large and small funds is shown up even more clearly when it comes to bonuses. In funds of less than £100 million under management, bonuses average out at under 10 percent of base salary. By stark contrast, the figure is more than 100 percent of base salary for funds worth more than £1 billion.

Of the respondents to the survey, only those employed by buyout firms enjoyed salaries of more than £300,000 per annum. But 84 percent of buyout staff had salaries of £150,000 or less, while 80 percent of venture respondents had salaries of £125,000 or less.

Gail McManus, managing director at PER, noted that: ?As the amount of private equity money increases, so the remuneration gap between large and small funds becomes increasingly apparent.? However, she added that, although better financial packages may help big funds to attract the best staff, ?The attractions of the job in terms of creativity, flexibility and the ability to influence businesses mean it is not all about the money.?

McManus said the ?quantum? of money earned by private equity professionals was approximately on a par with comparables such as the hedge fund industry and investment banking. The difference, she said, was in the timing. ?Hedge fund professionals are likely to get their cash quicker and with more certainty, but the overall amount private equity professionals are paid may actually be higher in the long term.?

However, she went on to say that private equity firms can be complacent about their biggest weapon in the battle to attract top staff: carried interest. The survey found that 80 percent of UK private equity professionals were participating in long-term incentive schemes – mainly carried interest programs – but that 90 percent of them were unable to quantify the value of their incentives. In addition, fewer than half understood how their bonus was calculated.

With carry schemes, the precise value of any profits accruing cannot be known until realizations are made. Nonetheless, in commenting on the findings, McManus urged GPs to be more helpful to staff. ?When a firm estimates the value of incentives based on their best knowledge and communicates that to the team, individuals will have a much better understanding of their likely reward. But we found that such estimates are not regularly made.?

McManus suggests that participants in carry schemes should periodically receive a valuation of their incentivization scheme (or perhaps a range of values, with the percentage likelihood of achieving each value), together with the expected length of time before entitlements can be accessed. She says members of such schemes are sometimes only made aware of the value of their schemes for the first time once they have received an offer to move elsewhere and decide to compare what's on offer with what they currently have.

Apax tops $5.5bn global bank tables
Private equity firms accounted for 16 percent of all global investment banking revenues in the first six months of 2006, with Apax Partners leading the rankings, according to figures from data provider Dealogic. Global investment banking revenues from buyout firms during the first half of the year totalled $5.5 billion (€4.29 billion), compared to $6.029 billion for the same period of 2005. Apax generated the most revenues in the period – $291 million in total, of which Deutsche Bank was the chief benefactor with a 12 percent share, or $34 million. Goldman Sachs Capital Partners and Kohlberg Kravis Roberts took second and third places with $243 million and $213 million of revenues respectively, with Goldman Sachs taking the largest share of both. Goldman Sachs also came second in terms of bank ratings for private equity-backed deals, with $499 million of revenues. JP Morgan came first, with Credit Suisse, Citigroup and Deutsche Bank rounding out the top five.

Directors deemed not liable in Disney case
June, US courts handed down a decision in the case over the liability of the directors in the high profile case involving the ?costly hiring and subsequent no-fault termination? of The Walt Disney Company president Michael Ovitz. Directors on the Disney's board were found to be not liable for the hiring and firing of Ovitz. According to a client alert from law firm Weil Gotshal, the 89-page opinion handed down by the unanimous Delaware Supreme Court on June 8 ?breaks no new ground, but reaffirms and clarifies the deference accorded by the Delaware Courts to directors who act in good faith and on an adequately informed basis, even when they fail to follow what corporate governance experts advise as best practices.?

Bank of Ireland partners with Paul Capital
Bank of Ireland has established a joint venture with Paul Capital Partners, a US private equity specialist, to provide private equity fund of funds products and advisory services to investors. The Irish bank said the move was another step to a diversified portfolio of investment boutiques. Paul Capital is looking to build on the bank's distribution and to expand its fund of funds offering. The new joint venture will be called Paul Capital Top Tier Investments and will be based in San Francisco, California. Bank of Ireland Group has paid $25 million in cash for a 50 percent share in the joint venture and may increase its shareholding up to 70 percent no earlier than 2008 on a pre-agreed basis. In addition, Bank of Ireland Group has paid $5 million in respect of interest in existing funds of funds. Paul Capital has contributed its existing private equity fund of funds business with assets of $1.1 billion under management, including the firm's fund of funds team and associated investment resources and facilities in return for a 35 percent interest. Senior management own the remaining equity.

New COO/CFO for Black Creek
Black Creek Group has appointed Jim Giuliano to the position of chief operating and financial officer for the Denver, Colorado-based real estate private equity firm. Giuliano's responsibilities will include providing ?strategic guidance? on Black Creek's real estate operating companies, as well as assisting Black Creek's managing principals to ?optimize business platforms and develop growth plans,? according to a company statement. He currently also stands as the CFO of Black Creek affiliate Dividend Capital Total Realty Trust, and previously served as executive VP and CFO of California-based real estate developer Empire Companies, as well as the principal financial officer for operations at US retail real estate investment trust Simon Property Group.