Sitting Pretty: Fundraising wave buoys salaries, bonuses. Are interests still aligned?

  • Median partner-level salary increase last year was 7 pct
  • Median non-partner-level salary increase in 2016 was 8 pct
  • Partners typically earn well over $300K

That investors don’t want fund managers to get wealthy from management fees alone has been a mantra stretching back to the beginnings of the private equity industry. The idea: keep partners hungry for scoring big exits, earning carried interest, and, in the process, enriching their investors. A true alignment of interests.

But here’s the deal: Fund managers get wealthy on management fees. Unless their charitableness rivals that of St. Francis of Assisi, buyout and growth equity professionals can live comfortably on just their salaries and bonuses while also accumulating wealth. Carried interest has become the icing on the management-fee cake — although that is not to downplay carried interest’s role as a motivator.

Consider that it took a six-figure income of $108,033 to be among the top 10 percent of earners in the United States in 2016, according to personal finance site DQYDJ, citing U.S. Census Bureau data. Achieving that is a breeze for PE professionals. Combined salaries and bonuses can easily run into the low $200,000 range for associates at buyout and growth equity shops. And partners typically earn well over the $300,800 threshold for being a top 1 percenter, according to the 2017-2018 North American edition of the Holt-MM&K-Buyouts Insider Compensation Report.

Based on a spring and summer survey of CFOs and directors of human resources at private equity firms, including 30 buyout and growth equity firms, the report also finds that the recent banner years for fundraising have led to big annual jumps in salaries and bonuses for many.

More than half (56 percent) of respondents at North American buyout and growth equity firms said their partner-level investment professionals saw salaries kick higher last year; the median increase was 7 percent. More than a quarter (28 percent), meantime, said their bonuses for 2016 performance rose over the prior year; the median increase was 10 percent.

The survey also asked buyout and growth equity firms to predict what would happen to salary and bonus compensation at their firms this year. Just under half (48 percent) of respondents anticipated that partner-level investment professionals would get salary increases this year, with the median increase being 5 percent — see accompanying table. More than a quarter (27 percent) said their bonuses for 2017 performance would grow bigger, with a median anticipated increase of 10 percent.

Junior-level investment professionals haven’t been left out of the party. Nearly four in five respondents at North American buyout and growth equity shops (78 percent) said their non-partner investment professionals saw a salary increase last year. The median increase was 8 percent. Four in five (80 percent) also anticipated that junior professionals would get raises this year, with a median increase of 5 percent.

Meantime, more than half of respondents (54 percent) said they paid more in bonuses to junior professionals for 2016 performance than for the prior year, with a median increase of 11 percent. And about the same percentage (58 percent) anticipated paying junior professionals more in bonus compensation for this year’s performance. The median anticipated increase is 10 percent.

Joseph Logan, managing director and founder of Pinnacle Group, a recruitment firm that helps to find junior executives for lower mid-market buyout firms and SBICs, said the rising cost of living in financial centers like San Francisco and New York is one factor driving base salaries higher at the associate level.

“If you’re looking at a one-bedroom in the $2,500 to $3,000 range you would need to get paid at least $95,000 to $100,000 base just to be able to afford your rent,” Logan said. First-year associates at lower-mid-market shops might earn a base salary of $90,000 to $105,000, he said, while post-MBA associates might earn $110,000 to $130,000. On top of that they may earn bonuses that run 50 percent to 100 percent of base salary.

Other highlights from this year’s compensation study:

  • It takes an average of 10 years to progress from earning an MBA degree (or gaining equivalent experience) to making partner at a buyout or growth equity firm. The median is also 10 years.
  • Almost nine in 10 (89 percent) of buyout and growth equity firms in the survey said they offer a 401(k) plan to employees.
  • Nearly a third of buyout and growth equity firms (29 percent) offer a gym membership as a perk to employees.

To be sure, investors bent on preventing their fund managers from getting wealthy from fee income alone won’t be able to take much comfort from the results of the compensation study.

On the other hand, many investment professionals aim to achieve far more than growing reasonably wealthy over their careers. Some want to become philanthropists, requiring a stratum of wealth that only vast payouts of carried interest could sustain. Some wish to create a lasting firm that provides opportunities for professionals far into the future. Others want to contribute to making the planet a better, more sustainable place to live. The number of multi-millionaires and billionaires that stay active at their firms well into their 60s and 70s demonstrates that money isn’t everything when it comes to motivation.

Savvy investors are surely already rethinking what it means for their interests to be aligned with fund managers.

Action Item: Read more about the compensation survey here: 8

Photo of man with cigar courtesy of Digital Vision/Getty Images