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How Much Can You Really Make in Private Equity and Investment Banking in the Long Run?

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How Much Can You Really Make in Private Equity and Investment Banking in the Long Run?

We see granular investment banking and private equity compensation data at OfficeHours, ranging from the specific offer letters given out to our mentees to recent bonus numbers directly from the coaches we work with.

At a high level, first year investment banking analysts make $100-$110K base, with bonuses placing them right around the $200K total compensation (”TC”) level. Banker pay bumps up substantially past the analyst years, with first year bulge bracket / elite boutique investment banking associates making $175K-$185K base and bonuses ranging from $140-$190K last year, pushing into the $315-$375K TC level.

For comparison, first year PE associates at upper middle market and megafund firms generally make $150 base, with bonuses ranging from the $150-$200K, resulting in TC around $300-$350K, though there are some outliers that push the $400K mark for first year PE associates (looking at you, Apollo). Note that these numbers have increased substantially in 2021 from upwards pressure in investment banking comp. We expect investment banking bonuses across the street to be down meaningfully this year.

To recap, IBD ASO 1 TC is in the $315K-$375K range, whereas PE ASO 1 TC is in the $300-$350K range. If investment banking associates make more than their PE associate peers, what’s all the hype about private equity about?

There are many reasons to move into PE, including developing an investor mindset and working with your portfolio companies longer term instead of on a deal-by-deal basis, but in this post we will dive into long term compensation in PE vs. banking.

Compensation at the Top

Many associate level finance professionals sometimes miss the bigger picture of long term compensation and don’t fully quantify the value of having carry and equity in a fund.

As an extreme example, let’s look at the heads of Blackstone and KKR vs. Goldman Sachs, JP Morgan, and Morgan Stanley.

Source: https://www.forbes.com/sites/hanktucker/2022/02/28/as-profits-rise-private-equity-billionaires-have-huge-paydays/?sh=308f66a1d56b

Blackstone Inc. Chief Executive Officer Steve Schwarzman took home $1.1 billion in dividends and compensation in 2021, in what amounts to one of Wall Street’s biggest annual payouts on record.

Meanwhile, Goldman Sachs CEO David Solomon, JP Morgan CEO Jamie Dimon, and Morgan Stanley CEO James Gorman all made ~$35MM in 2021.

Of course, Mr. Schwarzman has the benefit of being both a private equity magnate AND a founder, so he gets the best of both worlds when it comes to private equity compensation and founder upside. The WSJ cites:

“Schwarzman took in $941.6 million in dividends based on his 19% stake in Blackstone. He also earned $160.3 million in compensation, which includes profits based on investment performance and a base salary of $350,000. Schwarzman, 75, co-founded the firm in 1985 and continues to work as CEO, but President Jonathan Gray runs the company on a day-to-day basis.”

Nevertheless, the heads of the biggest private equity funds are out earnings the heads of the biggest investment banks by 4-40x.

VP Compensation

Though Steve Schwarzman’s comp is an outlier, compensation at the VP level drives the major comp delta in PE versus investment banking.

While our VP coaches at bulge bracket investment banks are pulling in anywhere from $700K-$1MM, our coaches in PE firms are making around $500K cash compensation as a first year VP. Factoring in carried interest in the fund is expected to yield an additional $500K-$1.5MM per year, bring annualized comp to $1-$2MM per year, around double what banking VP’s make! (Note that additional carry is awarded every year, usually in increasing amounts. Quantifying carry involves assuming the fund will achieve a certain MOIC, usually 2x+).

Of course, this back-of-the-envelope math makes many assumptions about fund performance, and one can’t forget the long vesting schedules of carried interest (it can be a 10 year commitment to realize all your carry as the funds you have a piece of make exits on their portfolio). However, our main point is that if you are optimizing on absolute compensation, the carry in PE funds is what drives meaningful delta in TC over the long term.

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