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Private Equity


If you are looking to get into finance in the first place, chances are that one of the biggest draws or appeals for you is the compensation. Don’t get me wrong, the money is definitely appealing, but with so many other high-paying options at large-cap technology companies and start-ups, it makes the thought process around compensation fairly difficult, obscure, and overwhelming. 

This is not helped by the fact that there are so many different opinions and forums across the internet discussing compensation that are often misleading and give folks the wrong idea of what reality is. The fact of the matter is that while investment banking salaries are generally quite transparent, compensation is far more difficult to understand and even standardize in private equity because there are so many different variables at play. Compared to banking, private equity also offers other incentives that may not feel like compensation but certainly can affect your life like compensation, so those are very important to scrutinize when considering whether or not private equity is for and if the compensation is actually better for you and your needs. 

Private equity compensation at the junior level is very similar to that in investment banking. This is largely due to a few factors but mainly the fact that you are largely a process machine and are not driving deal flow or adding to your firm or bank’s bottom line through sourcing a deal or executing a deal you held pen on. First and foremost, you have a base salary that generally begins at the $100-110K range for first-year analysts and ratchets up $10-15k a year until you become an associate (generally). Your bonus is likely to be anywhere from 50-100% of that base figure but in banking, it is highly variable on deal flow. I’m sure you are aware of how slowing M&A and debt financing activity is hurting the profits of the big banks (and your friend’s bonuses).

Private equity takes a bit of a different approach to this, while the numbers are largely the same, the business models are different. Private equity is in the business of asset management, they clip a 1-2% management fee on the total assets they manage. For funds across the size spectrum, this results in a stable, recurring source of revenue that they can use to cover expenses like salary, rent, and bonus compensation. As such, from what I have seen, you tend to see far less volatility in terms of the bonus figure as a percentage of your base salary; I would estimate it to be 80-100% with variability coming from the size of the funds themselves as opposed to actual performance levels. This obviously changes when your compensation starts to become more reliant on your contribution to deals and such but at the junior level, the size of the fund you are working at will be the largest factor in your compensation (unless you are the lucky minority that gets a bit of carry early on – unlikely unless you are at a smaller shop). The rule of thumb is simple, the larger the fund, the more the pay. Of course, there will be exceptions but this is an approximation from my experience. Where this makes a noticeable difference is years like this one, for example, when the banks were performing fairly poorly due to slow deal flow but where private equity compensation at the junior level was pretty unaffected, this stability at the junior level in terms of base and bonus was a huge motivating factor towards my move over. 

Now we get to every private equity fanboy and fangirl’s favorite word, carry. Carry, specifically carried interest, is where large sums of money are made in private equity. Carried interest is typically a form of profit share that is paid out in excess of a preferred return – i.e. if a fund outperforms a benchmark rate expected by its investors, the GPs of a private equity fund gets a share of the excess returns. This is a tool used to align incentives between the investors and the managers. When you are managing large sums of money, if a fund is 2x’ing investor money, this figure gets pretty large, very quickly.  

At the junior level, this is virtually non-existent, again, likely because you are not actively generating deals for the firm, which I think is a fair trade off. Typically, carry starts to become a larger part of your compensation when you are at the VP level and above. However, the dynamics around carry tend to be less straightforward and vary greatly on a fund by fund or firm by firm basis. Some firms pay you out based on the actual company performance and some pay based on fund performance. However, the one thing that is common is that you tend to not get a lump sum payout – carry typically vests over a number of years and so you would likely get a “portion” of carry every year post an exit or the return of a fund. Additionally, there are often clawback clauses in carry packages that state that if your fund doesn’t meet a preferred return for a future fund, they may be entitled to take that previously paid out carry back (but that is for another day). 

In banking, it seems like this is far less of a factor until you reach the managing director level, where you start becoming a deal maker. From what I have heard, the vesting schedule for the portion of deal fees that an MD generates is less restrictive than that of the private equity carry but still comes with some sort of retention clause that keeps you fairly tied to the firm. While some people find this unfair, I think it is important to consider why these terms are there in the first place. If all your talent left after scoring a big win, it would likely create a drain on your internal talent pool and could potentially leave the fund to underperformance in future years, let alone the reputational risk of losing a top dealmaker.

I think another aspect that is often overlooked in terms of compensation is the ability to co-invest in private equity funds. Now yes, while I understand that you need to contribute money in order to participate in co-invest programs, certain funds at smaller levels tend to offer some level of matching which can already generate an immediate return on your personal investment. More importantly, however, I think the ability to invest in sophisticated, institutional-grade private equity funds is a huge advantage when it comes to the ability to compound your personal capital. Very few people in the world have the ability to access these types of investments without paying high fees and having massive contribution minimums. Co-investing truly is a unique form of “compensation” that I see many folks overlooking when considering their offer packages. I know that at investment banks they offer matching contributions towards purchasing bank stock which can be lucrative if you are at one of the better managed banks like BofA, JPM, or GS but will likely not be great if you are at the other banks. 

To conclude, while these all seem like great perks (and they are), it is very important to consider that they all have their pros and cons. While private equity compensation at the more senior levels is more variable based on fund performance and investment acumen, banking compensation is at the mercy of economic cycles and the skills and relationships of the managing directors at the helm. There is one constant, though, variability. Going one way or another is not necessarily better or worse in terms of your outcome – the money is great at both ends and is now at greater parity than in previous years (at junior levels at least); I personally find it a matter of preference when it comes to the work you enjoy doing. Let’s be honest – you are still making more money than most people your age so it’s important to take that into consideration and be grateful regardless. 


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