The world is in an economic downturn… or is it? Tell that to the private equity industry, where the pandemic appears to have had practically no effect on salary trends. If 57.5 percent of PE professionals received raises in 2019, a near-identical 57 percent saw fatter pay packets in 2020!
Is this in line with PE activity during the year?
The trends are interesting. Several top private equity firms and venture capital (VC) firms in Europe reached final closings on their latest fundraising rounds in the recent weeks and months. Deal activity has picked up with PE firms showing more confidence in the likelihood of the economy eventually recovering in the UK and in mainland Europe. They are bullish about the near-term future.
How has hiring been affected?
Nearly two-thirds of firms — 63 percent, to be precise — responding to the MM&K 2020 UK and European PE and VC Compensation Survey confirmed they had hired more people into their investment teams in 2020, with 57 percent bringing more back-office staff on board. Looking ahead to 2021, 64 percent of firms expect larger investment teams, with just 8 percent anticipating a decline.
This points to a talent war that is alive and kicking, and thereby bright prospects for private equity careers. The largest firms have substantial investment reserves, which they can scarcely afford to keep idle. And with more deals comes the need for more talent, both for investment and operations. There will be continued demand for investment professionals at the junior level and operational improvement people at the senior level.
What are the trends in compensation?
With the higher retention efforts from the top private equity firms, the compensation will only go up. For the sixth successive year, PE and VC pay packages have gone up, according to the 2020 Private Equity and Venture Capital Compensation Report. It was the first time that as many as 68 percent of respondents reported total compensation in excess of USD 200,000. This points to a correlation between higher compensation and better fund performance. In 2019, for managing partners at PE firms with less than USD 20 billion assets under management (AUM), average cash compensation including bonuses was in the range of USD 1,100,000–3,700,000 million, while for partners and MDs, the range was USD 596,000–2,200,000.
There is a change in the calculations behind compensation plans too. A survey by Heidrick & Struggles revealed that 15 percent of PE investment professionals had a formula-driven bonus plan, while 71 percent, it was discretionary. Within the latter group, variable compensation was fully discretionary for 63 percent, while 25 percent reported it was based on individual performance.
Interestingly, two-thirds of firms in the UK and Europe expect the bonus component for 2020 to stay on the same lines as in 2019, somewhat surprising given the low PE and VC activity in the earlier part of 2020. A huge majority — 86 percent — of firms expect higher compensation for their investment professionals posts the next review, though only up to 5 percent.
How has the split between base and bonus pay changed?
Take a look at the increase in base pay for professionals in the private equity industry in North America. Of the approximately 450 people reporting hiked base pay,
- Up to 10 percent increase: 40 percent
- 11–20 percent increase: 33 percent (approximate)
- 21–50 percent increase: 23 percent
How total compensation will change is yet to be seen, given that bonuses would have been paid out just in December. Typically, half the total pay comes from variable compensation, with the most senior levels getting well above half their pay from variable compensation. Bonus calculations give weight to a combination of fund, firm, and individual performance. Since 2014, the share of bonus in total compensation has been declining for those who have reached senior levels in their private equity careers, though it is still high at firms employing more than 100 people.
Is certification helpful for getting higher pay in the PE industry?
Certainly. For someone working or looking to work in the private equity industry, a PE certification is indelible proof of possessing the latest skills and know-how in the field, along with a readiness to take on higher roles and responsibilities attracting better pay packages.
An excellent certification choice is the Chartered Private Equity Professional (CPEP™) certification, offered by the United States Private Equity Council (USPEC). CPEP™ offers exactly what top private equity firms want — knowledge and appeal based on the rigorous USPEC IFIS™ body of knowledge, which gets them ready for great private equity careers.