Knowledge Center: Publication
2019 North American Private Equity Investment Professional Compensation Survey1/23/2020 Jonathan Goldstein and John Rubinetti
This year’s survey includes a review of 2018 and year-to-date 2019 activity in North American private equity, our thoughts on the major hiring trends for investment professionals, and an exploration of the composition of 2019 compensation packages for investment professionals, based on responses from 895 survey participants. (For more on the design of the survey, see sidebar, “Methodology.”) Those participants were divided into five groups based on level and responsibility. (For the definition of each group, see sidebar, “A note on titles.”)
The following summarizes what we found.
Private equity: The big picture (full results here)
- The state of the US private equity market is strong. As of November, US private equity funds had raised $246 billion in 2019, more capital than in any other year recorded by PitchBook, and up substantially from a previous high of $238 billion in 2017. With several large vehicles expected to close before New Year’s Day, the final total will likely be higher still.
- Large firms are driving the growth of private equity fundraising. Firms with at least $5 billion in assets under management (AUM) accounted for more than half of all fundraising through the third quarter of 2019, according to PitchBook. This bodes well for compensation because the higher the AUM, the higher the compensation will likely be for a firm’s investment professionals, depending on the length of their private equity experience.
- Indeed, there are many signs that both industry growth and compensation packages will continue to be robust. Stock market indices are still signaling optimism, and, in late October, the Federal Reserve made its third cut to interest rates this year.
- Investors are using fund assets to buy stakes in general partners and other asset managers rather than commit capital to the general partners’ funds.
- Finally, the secondary market for fund stakes is booming as general partners get increasingly creative in structuring their secondary transactions.
Investment professionals: Hiring trends (full results here)
- While the operating partner role is the fastest-growing position within the private equity industry as of mid-2019, the actual number of investment professional assignments continues to dwarf operating partner assignments. This is true across all areas of private equity.
- The advent of larger funds and new strategies is creating increased competition for talent, particularly at the partner/managing director level.
- At the same time, we are seeing an increase in retirements among managing partners and partners/managing directors at private equity firms, and we expect that trend will continue.
- In addition to their effect on employment levels at PE firms, retirements are spurring the growth of family offices as these retiring professionals focus their efforts on their own wealth.
Investment professionals: Compensation trends (full results here)
- More than half of respondents (56%) reported an increase in base salary from 2018 to 2019, a slightly lower figure than the share of respondents (59%) whose base increased from 2017 to 2018.
- More than three-quarters of respondents (77%) indicated that their bonus increased from 2017 to 2018, the latest year for which data are available.
- Among those respondents who experienced an increase in 2019 base salary, 74% reported an increase of up to 20%, down from 77% in last year’s report.
- Of those reporting an increase in 2018 bonus compared to 2017, 14% had an increase of more than 50%.
- The mean of total cash compensation by AUM soared for managing partners at firms in the $6.00 billion to $9.99 billion range. There were also notable gains for managing partners at firms in the $2.00 billion to $3.99 billion range.
- For 68% of respondents, bonuses are discretionary. Most bonuses are still paid in December.
Carried interest provisions (full results here)
- While carry remains uncommon at the associate/senior associate level, almost all of the investment professionals at more senior levels reported receiving carry.
- For more than half of investment professionals at every level, carry vests on a fund basis, rather than a deal-by-deal basis. This is true for 89% of all managing partners, compared with 66% of all associates/senior associates.
- For the majority of investment professionals, it takes five years for the maximum amount of carry to vest.
Co-investment eligibility and rights (full results here)
- Almost all investment professionals have co-investment eligibility. Co-investment is fund-based for 57% or more of respondents at each level.
- A smaller percentage, generally 14–20% for most levels, is deal-based. The percentage of deal-based co-investment eligibility is highest among associates/senior associates (38%).
- Many investment professionals are provided with leverage on the dollars they invest, ranging from 40% of those at the associate/senior associate level to 48% of those at the vice president levels.
Compensation fairness (full results here)
This year, for the first time, respondents were asked to indicate whether they considered themselves to be receiving appropriate remuneration for their efforts. We found that across levels of seniority, investment professionals who believed they were underpaid were more often receiving compensation on the lower end of the scale reported in the survey than those who felt their pay was fair. Many of those who thought they received fair compensation were actually in the top quartile among their peers.
As of November, US private equity funds had raised more capital in 2019 than in any other year recorded by PitchBook: $246 billion, up from a previous high of $238 billion in 2017.1 Large funds--those of at least $5 billion—made up more than half of all fundraising through the third quarter of 2019 and, with several large vehicles expected to close before New Year’s Day, the final total will likely be higher still.
Indeed, there are many signs that industry growth, and compensation, will continue to be strong:
- Stock market indices are still signaling optimism.
- The Federal Reserve lowered interest rates by a quarter of a percentage point in late October of 2019, its third cut this year.
- Investors are using fund assets to buy stakes in general partners and other asset managers rather than commit capital to the general partners’ funds.
- The secondary market for fund stakes is booming as general partners get increasingly creative in structuring their secondary transactions.
The growth of the private equity (PE) industry shapes hiring trends. While the operating partner role is the fastest-growing position within the private equity industry as of mid-2019, the actual number of investment professional assignments continues to dwarf operating partner assignments. This is true across all areas of private equity, from growth equity to buyout, as well as at firms with flexible capital or a special situations mandate. The advent of larger funds and new strategies is creating increased competition for talent, particularly at the partner/managing director level.
At the same time, we are also witnessing an increase in retirements among managing partners and partners/managing directors at PE firms, a trend that we expect will continue for the foreseeable future. These retirements are also changing the shape of the industry by spurring the growth of family offices as these private equity professionals look to preserve the fruit of their efforts.
Compensation for PE investment professionals in North America in 2019 experienced only modest changes compared to 2018, as expected. More often than not, sharp increases in compensation occur when there is a sale of a portfolio company, an increase in fund size, or a bump in title.
More than half of respondents (56%) reported an increase in base salary from 2018 to 2019. While this figure is slightly lower than the share of respondents (59%) whose base increased from 2017 to 2018, more than three-quarters of respondents (77%) indicated that their bonus increased from 2017 to 2018, the latest year for which data are available.
For those respondents who experienced an increase in 2019 base salary compared to 2018, 74% reported an increase of up to 20%, down from last year’s report. Roughly 77% of investment professionals reported an increase in their bonus from 2017 to 2018, the same percentage as was reported last year. For 2017 to 2018, however, 86% reported an increase of up to 50%, down from 90% who reported the same level of increase from 2016 to 2017.
Once again, base compensation increased for private equity professionals across all levels from 2018 to 2019, although the gains were far from uniform. The mean of total cash compensation by assets under management (AUM) soared for managing partners at firms in the $6.00 billion to $9.99 billion range. Gains at smaller firms were generally more modest, although there were also notable gains for managing partners at firms in the $2.00 billion to $3.99 billion range.
Educational background of respondents
While the education of private equity professionals continues to fall into two broad categories, MBA and non-MBA, this year’s data gives a clearer picture of the prevalence of non-MBA educations, such as law degrees or CPA licensure. Among managing partners, 17.4% reported a JD or other postgraduate degree, compared with 11.8% of partners/managing directors and only 6.4% of principals, 5.4% of vice presidents, and 3.4% of associates/senior associates. CPA or equivalent credentials were reported by 11.3% of partners/managing directors, 6.5% of managing partners, 5.4% of vice presidents, 4.9% of principals, and 4.7% of associates/senior associates.
Years of industry experience
The number of years of PE experience still correlates with professional level. Interestingly, we see some partners/managing directors with as little as one year of private equity experience and managing partners with as few as four years of private equity experience. These data points are outliers, but we feel they are a reflection of the robust growth in the private equity market.
We have witnessed some of the larger firms at times recruiting bankers or executives outside the industry when they are seeking to fill a gap either in industry experience or some other noninvestment-related skill set. The larger firms feel that an excess of investment judgment on their teams will compensate for a lack of principal experience from new senior hires. We believe that, in the rare case of a managing partner with relatively few years of PE experience, the managing partner has a strong relationship with a limited partner who puts the managing partner into business. It is worth repeating that, in our experience, this is very rare. The average number of years of PE experience in 2019 remained consistent at all levels compared to 2018.
State of investment professional compensation
Average base, bonus, and carry by seniority
Annual bonus plans
Some 68% of investment professionals surveyed received a discretionary bonus. While the bonus of most of these professionals is entirely discretionary, 29% of this group received a discretionary bonus based on individual performance. Of those who received a formulaic bonus, 47% said it was based on individual performance. Most bonuses pay out in December, although the percentage is slightly lower than that reported the previous year.
As has been the case in our previous analyses of compensation for PE investment professionals, more than two-thirds of those who are eligible for carried interest indicated that vesting is based on a straight-line schedule rather than a cliff vesting schedule.
While respondents at every level said they contributed some capital towards their portion of carry, senior investment professionals are most often required to do so. Among managing partners, 77% indicated that they contributed capital in 2019, compared with only 19% of associates/senior associates.
The percentage of investment professionals whose carry is subject to clawback provisions in a bad leaver situation generally increases with seniority, and 43% of managing partners faced such provisions in 2019. However, more than half of respondents at the principal, partner/managing director, and managing partner levels had their carry subject to holdback as reserve for potential fund underperformance.
Many private equity firms offer their investment professionals an option to co-invest in addition to their cash compensation and carry, and some provide their investment professionals with loans to do so. This year saw a notable spike in such assistance, with 40% or more of all associates/senior associates, vice presidents, principals, and partners/managing directors reporting that they had been provided with leverage. In 2018, only principals were offered that level of leverage, and only 25% of associates/senior associates said that they had received co-investment loans that year.
Comparisons of compensation by region and experience
Comparison of compensation across US regions
In 2019, total cash compensation for investment professionals in the Northeast surpassed those in other regions at all levels with two exceptions. Partners/managing directors on the West Coast led the country in compensation for that level, earning 10% higher compensation than their Northeast counterparts, while principals in the Southeast slightly edged out those in the Northeast.
Comparison of years of private equity experience and compensation
The relationship among years of private equity experience, mean total cash compensation, and total carry by AUM shows that, on the whole, the more years of private equity experience and the higher the AUM, the higher the compensation.
This year, for the first time, we asked investment professionals how fair they think their level of compensation is. Respondents were asked to indicate whether they considered themselves to be receiving appropriate remuneration for their efforts.
On the whole, satisfaction with compensation rises with seniority, as one would expect. We then looked at both those individuals who thought they were being underpaid and those who thought they had been fairly paid to see if those perceptions were accurate with respect to the market. We found that across levels of seniority, investment professionals who believed they were underpaid were more often receiving compensation on the lower end of the scale reported in the survey than those who felt their pay was fair. Many of those who thought they received fair compensation were actually in the top quartile among their peers.
In an online survey, we asked participants to provide compensation data from 2017, 2018, and 2019. All data collected is self-reported by private equity investment professionals and has been aggregated to evaluate trends in compensation packages, including base salary, bonus, and carried interest plans (carry).
Responses from 895 participants are included in the survey results.
In each compensation table, we report the lowest response, lower quartile (25th percentile), mean, upper quartile (75th percentile), and highest response. Please note that the mean can be influenced by particularly high or low data points, especially in small sample sizes. Many firms that use compensation surveys set their compensation targets around or above the upper quartile (75th percentile).
Carried interest is calculated using “carry dollars at work”—the expected return on total carry participation across all vehicles, based on achieving a net 2x return (above hurdle and after fees) in a vehicle charging a 20% performance fee. For example, 7 points (700 bps) of carry (out of a possible 100) in a $500 million fund with 20% carry would result in $7 million of carry dollars at work (500 X 0.2 X 0.07 = 7).
All compensation figures in tables and charts are reported in USD thousands unless otherwise noted.
While title structures vary according to firm, we have divided respondents into five groups based on level and responsibility.
Managing partner: Most senior level at the firm. Typically, although not always, one of the founders.
Partner/managing director: Proven investment track record. Experienced deal maker and board member.
Principal: Investment professional with early experience originating and leading their own investments. Accomplished executor with experience on board of directors. Leads and manages deals for the firm. Personal track record not yet extensive.
Vice president: Deal “quarterback.” Responsible for high-level company and business plan analysis. Leads due diligence and manages service providers and financing. Develops proprietary network of contacts for due diligence and deal-flow generation. Works closely with the portfolio and might have board exposure or a board seat.
Associate/senior associate: Responsible for analyzing companies and business plans, conducting due diligence, and working with service providers under the direction of the vice president.
About the authors
Jonathan Goldstein (firstname.lastname@example.org) is the regional managing partner of Heidrick & Struggles’ Private Equity Practice for the Americas; he is based in the New York office.
John Rubinetti (email@example.com) is a principal in the New York office and a member of the Private Equity Practice.
The authors wish to thank Mohd Arsalan and Samantha Lassoff for their contributions to this report.
1 PitchBook, US PE Breakdown: 3Q 2019, October 2019.