Welcome to our 2020 North American Private Equity Investment Professional Compensation Survey. Together with our biannual survey of private equity operating professionals, this report provides a comprehensive picture of the compensation that North American private equity executives are currently receiving.

For this report, Heidrick & Struggles compiled compensation data from a survey of 785 investment professionals in North America. Against the backdrop of the global COVID-19 pandemic, we explored a range of topics on compensation and executives’ backgrounds.

Executive summary

This year’s survey includes a review of 2019 and year-to-date 2020 activity in North American private equity (PE), our thoughts on the major hiring trends for investment professionals, and an exploration of the composition of 2020 compensation packages for investment professionals.

While we can already see the impact of COVID-19 on the PE industry, the pandemic has not yet proven as damaging to the sector as the global financial crisis of 2008–2009. Deal-making activity and deal exits are both down, but the industry has not fallen into the paralysis that marked the earlier crisis. It’s also important to note that PE started the year in a strong position: Last year was the strongest year we have seen in investment professional recruiting in 20 years. Hiring activity fell sharply in the first quarter of 2020 but rebounded somewhat in the second quarter.

Investment professionals with technology expertise, particularly in software, continue to be in high demand, as do those with fintech acumen. We have also found strong demand for technology professionals outside of pure-play tech firms as the need for digital dexterity continues to rise in all sectors. It’s notable, too, that executives in the industry have not shied away from exploring new opportunities, treating the pandemic as an inflection point for reevaluation.

As was the case last year, the so-called mega-funds ($5.00 billion+) continued to drive the growth of private equity fundraising. Pitchbook notes in its Q2 report that several funds closed in the quarter and that there were several launches.

Compensation for PE investment professionals in 2020 remained largely unchanged. More than half of respondents (57%) reported an increase in base salary from 2019 to 2020, but for 40% of those who earned a higher base, the increase was modest: 10% or less. Only 64% of respondents reported an increase in bonus from 2018 to 2019, down from the 77% who saw an increase from 2017 to 2018. The mean total cash compensation remained strong for firms of all sizes. However, the substantial gains seen by managing partners at firms in the $6.00 billion to $9.99 billion range in 2018 were not repeated in 2019.

As we have seen in the past, most bonuses are discretionary and paid in December. Carry remains uncommon at junior levels, and it vests on a fund basis, rather than a deal-by-deal basis. Thirty-three percent of respondents said that the maximum amount of carry vests when a fund closes, but vesting is spread fairly evenly across other years. Of note this year: The percentage of managing partners facing clawback provisions rose to 55%, from 43% in 2019.

Many private equity firms offer their investment professionals an option to co-invest, and some provide them with loans to do so. In 2020, 44% or more of all associates/senior associates, vice presidents, principals, and partners/managing directors reported that they had been provided with co-investing leverage, up from 40% in 2019.

State of the private equity market

The private equity market in 2020, just like almost every other aspect of global economic activity, is shaping up to be significantly different than that of 2019 because of the COVID-19 pandemic. According to the National Bureau of Economic Research, the United States officially entered a recession in February 2020, ending the longest period of economic expansion in more than 150 years.

Pitchbook data for the first half of 2020 indicates that the velocity of PE deal making overall slowed in both of the first two quarters from the same periods in 2019. Firms closed on 2,173 deals totaling $326.7 billion in the first half, which put total deal value nearly 20% below its levels of the first half of 2020.¹

Pitchbook has also found that many general partners have sought to pull out of previously agreed-upon deals. Median deal size has fallen for the first time in five years and exit activity has collapsed as PE firms elected to hold onto investments even as they sharply marked down their portfolio companies. During the first half of 2020, US PE firms closed 392 exits, down from 1,099 for all of 2019. The value of exits in the most recent half was $134.8 billion, down from $365.2 billion for all of 2019. The news elsewhere was equally grim: Pitchbook found that announced global PE exits were down approximately 70% in May 2020 compared to May 2019. Pitchbook expects these trends to continue.

A bright spot in the current market is that PE fundraising momentum remains healthy even if it is off 2019’s torrid pace. Pitchbook noted that the second quarter of 2020 also saw the launch of several mega-funds, and the US Department of Labor clarified rules around including PE funds in diversified funds, potentially giving PE access to retail accounts, though the change is not expected to immediately result in major changes to such funds.

Before COVID-19 became widespread, 2020 had been shaping up to be a very robust market for first-time funds and spin-out groups. We see two potential areas of growth for the future: social impact investing and special purpose acquisition companies (SPACs). SPACs may be particularly well-suited to the current moment because they allow a PE firm to take two years to find a target acquisition.

The outlook for the second half of 2020 is cloudy. While some data would seem to indicate that the worst of the economic crisis is behind us, the rate of coronavirus infections and deaths remains high in many parts of the United States. PE activity may also be affected by greater uncertainty around the November presidential and congressional elections than might have been anticipated at the start of the year.

Hiring trends

Last year was the strongest year we have seen in investment professional recruiting in 20 years. COVID-19 has put a damper on that growth, but we are still seeing an active market, notably more active than what we saw during the global financial crisis almost a decade ago.

We believe that there are two reasons for this. First, the PE industry is much larger now than it was during the financial crisis, and because that crisis was financial in nature, there was an overall paralysis in financial services. Now, while there is most definitely uncertainty in the industry, it is not frozen. In particular, with technology becoming ever more important, firms are actively seeking professionals with pure-play technology experience to help them evaluate prospective investments in that sector and to lend their expertise in other technologically enabled businesses. Second, interest rates remain historically low, and the relatively strong stock market is also likely contributing to continued PE hiring. If PE hiring continues at its current pace, which is not a given, it could surpass activity in 2020.

Executives have not shied away from exploring new opportunities, treating the pandemic as an inflection point for reevaluation. Some may be looking to move away from firms that had invested in sectors that have been hit hard by the pandemic, such as retail and other consumer sectors.

While our survey did not include a question about diversity, we have seen increased attention being paid by PE firms to ethnic and gender diversity in recent years. Yet there remains little growth in diversity among PE executives. We believe that firms are unlikely to make progress on this front in their upper management ranks until they commit to hiring candidates from outside the sector.

One of the trends we observed in last year’s data, founder retirements, appears to be on pause for the moment. While firms continue their succession planning and management development, we are not seeing the expected wave of founder retirements in 2020 thus far. The change may not be entirely related to the pandemic. Instead, we believe the reasons lie in firm growth, as well as the adoption of new strategies and new fund formation.

Compensation trends

Compensation for PE investment professionals in North America in 2020 remained largely unchanged from 2019. This continues a trend that we observed in 2019.

More than half of respondents (57%) reported an increase in base salary from 2019 to 2020, but for 40% of those who earned a higher base, the increase was modest: 10% or less.

There was also a falloff in respondents reporting an increase in bonus from 2018 to 2019. Only 64% reported such an increase, down from 77% from 2017 to 2018. Of those who reported an increase in bonus, 32% said the increase was between 11% and 20%, while 29% saw an increase of between 21% and 50%. Only 17% saw an increase of more than 50%.

The mean total cash compensation by assets under management (AUM) remained strong for firms of all sizes, although the substantial gains seen by managing partners at firms in the $6.00 billion to $9.99 billion range for 2018 were not repeated in 2019.

About the authors

Jonathan Goldstein (jgoldstein@heidrick.com) is the regional managing partner of Heidrick & Struggles’ Private Equity Practice for the Americas; he is based in the New York office.

John Rubinetti (jrubinetti@heidrick.com) is a principal in the New York office and a member of the Private Equity Practice.

Acknowledgment

The authors wish to thank Mohd Arsalan for his contributions to this report.

References

¹ Pitchbook, US PE Breakdown: 2Q 2020, July 9, 2020.