All the debating and lobbying and sweating about whether one day buyout professionals will have to pay regular income taxes, not capital gains, on their profit share sometimes obscures two human-resources-related truths. One, firms have been hiring at a fast clip. And two, already-generous compensation packages have been racing skyward across the industry.
Ample evidence for these developments comes from the 2016-2017 Holt-MM&K-Buyouts Insider PE/VC Compensation Report, jointly published earlier this month by Buyouts Insider (publisher of Buyouts) and compensation consultants Holt Private Equity Consultants and MM&K. The report is based on a spring/summer survey of more than 100 buyout, growth equity and venture capital firms located in North America.
More than a third (34 percent) of the 38 buyout and growth equity firms participating in this year’s study said they had added partner-level investment professionals to their payrolls last year. Another one in five (21 percent) said they anticipated doing so again this year, while very few (3 percent) anticipated decreasing staff at that level. The median expansion in partner-level investment professional staffing this year is expected to be 22 percent.
Nearly half of buyout and growth equity firms (45 percent), meantime, said they had added junior-level investment professionals in 2015, while nearly the same percentage (47 percent) anticipated doing so again this year. The median expansion expected in junior investment professional staffing this year was 20 percent. Just 3 percent anticipated reducing staffing at this level this year.
Hiring on the administrative side of sponsors is more tempered, especially at the partner level. Perhaps it’s a sign that four years after having to register as investment advisers, firms feel they’ve done enough to comply with SEC rules and to meet the related, growing demand from investors for more information about how fees and expenses are handled.
Just 3 percent of buyout and growth equity firms responding to the survey said they hired administrative staff at the partner level last year and none anticipated doing so this year. At the junior level 38 percent hired administrative and support staff last year, and a bit more than a quarter (26 percent) anticipated doing so this year. Notably, 16 percent said they planned to reduce staffing at this level in 2016.
All told, the North American buyout and growth equity firms in the study have an average of $2 billion of assets under management, defined as committed capital to all active funds. The median is $1 billion, bottom quartile $229.5 million, and top quartile $2.3 billion.
Wondering how your firm measures up when it comes to staffing versus assets under management and size of portfolio? Here are a few statistics from the study for the buyout/growth equity sample:
- Assets under management per partner averages $281.8 million, while the median is $147 million, bottom quartile is $32.9 million and top quartile is $333.4 million.
- Assets under management per investment professional, including both partners and non-partners, averages $104.9 million. The median is $54.2 million, bottom quartile is $12.1 million and top quartile is $122.9 million.
- The average number of portfolio companies per partner is 6.2. The median is 3.4, bottom quartile is 1.9 and top-quartile is 12. For all investment professionals the average number of portfolio companies is 2.3, median is 1.3, bottom quartile is 0.7 and top quartile is 4.4.
Meantime, compensation continues to rise across nearly all eight major job categories at firms: managing general partner, senior partner, partner, principal/director, vice president/senior associate, associate, CFO and COO. From 2015 to 2016, changes in median salary and bonus ranged from flat for COOs at buyout and growth equity firms, to a rise of 28 percent for vice president/senior associate.
Survey respondents anticipated that this year would be another good year for investment-professional compensation. More than one in four (26 percent) said that salaries would rise in 2016 for partner-level investment professionals, with a median anticipated change of 7 percent. About one in four (25 percent) anticipated that bonuses for 2016 performance would rise for partner-level investment professionals.
Junior investment professionals, below the partner level, also have a lot to look forward to. More than two-thirds (70 percent) of buyout/growth equity firms in the study said they would raise salaries for this group in 2016, with a median anticipated rise of 8 percent. More than a third (37 percent) said they expect bonuses for 2016 performance to rise for this group.
Of course, all these figures leave out what’s designed to be the biggest part of the compensation of partners at buyout and growth equity firms — carried interest. And in fact, the study found that partner-level investment professionals earned more in carry distributions for 2015 exits than they did in annual salary and bonus, as you might expect.
No one likes paying higher taxes. But private equity would still be an enormously lucrative profession, even if carried interest were taxed as regular income.
Action Item: Learn more about the study at https://goo.gl/sGtaSY.
Image Credit: Image of Sherlock Holmes courtesy of ©iStock/Ostill, Getty Images