Private Equity Salary and Bonuses – From Analyst to Partner
It is every investment bankers dream to land a job on the buyside. Private equity is one of the most (if not the most) common exit opportunity for investment bankers. The thought of more pay, less hours and more meaningful work causes a lot of investment bankers to want to make the jump after a few years as an analyst.
Almost all young investment bankers fresh out of college have the herd mentality. Everyone hates on the investment banking lifestyle and laughs at you if you even consider staying on as an Associate. The buyside is where the herd wants to go. It is very hard to deviate from this mindset and do something different when almost everyone around you wants to do it.
Why private equity?
Now there is a reason most people want to break into private equity. If you land a good job at a good private equity shop right out of investment banking, you are guaranteed to have close to seven figures saved in the bank by the time you are in your early 30s (unless of course you have a gambling addiction or waste your money on watches, cars, or other expensive items).
But money shouldn’t be the sole reason why you want to do private equity. You can make a similar amount in your 20s if you stayed in investment banking. Investment banking compensation is not all that different than private equity (at least at the junior and mid-levels). The real difference comes in when you become more senior and start to get carry in the fund. More on private equity bonuses below.
If it is not for the $$$ then why should you do private equity? Please don’t say it is because you want more “operational” experience. If your answer is that you want more operational experience, then you probably won’t get a job in private equity. The life of a private equity associate is not all that different than life as an investment banking analyst. Most of your job will be sitting in front of your computer modelling, working with your deal team, sitting in on management meetings, and calling up bankers and other parties needed to complete a deal.
If you want more operational experience, then go join a startup, small business or some managerial position in the corporate role.
Benefits of a career in private equity
- Money – Pay is top notch for someone who is in their 20s.
- Interesting work – get a dive deep into understanding the fundamentals of businesses, industries, competitors, growth prospects, etc.
- Long-term investment focus – This is the big difference between private equity investments and hedge fund investments. You hold your portfolio companies for 5+ years typically, so you think more about the business’ fundamentals in the long run and less about quarterly earnings.
- Strategic thinking – While you don’t get direct exposure to the operational side of the companies you invest in, you do get exposure to the overall growth strategy and management plan. Investments in private equity are all about having multiple ways to win, either through driving overall organic growth through capturing market share, increasing customer’s share of wallet or inorganic growth through add-on acquisitions.
- Proven investment style that has delivered consistent returns over the long run – while this has been true in the past, who knows if it continues to stay true in the future given how much money has flooded the industry.
- Exit opportunities – if you ever wanted to switch careers down the road, there are a ton of different career paths you could choose.
Downsides of a career in private equity
- Little work / life balance – wait I thought everyone goes to the buyside to work less?? Wrong. Good chance you’ll end up working more than you used to on average (unless you join a middle market private equity shop that has good culture/hours)
- Stress – unlike a corporate job where everything moves at a snail’s pace, everything moves very quickly whenever you are trying to make an investment. Just like in investment banking, whenever you are in the middle of a deal, expect to work around to clock to meet deadlines.
- Not creating anything tangible – you can’t believe how many people after working a few years in private equity complain about how they aren’t fulfilled at their jobs. A lot of people want to work directly on building a business, creating something of value for people. Once you save a lot of money, you start to question what is it that you really want to do in life (read why I quit a 500k/year job). In private equity, you are just a capital allocator, picking and choosing where to invest money.
Private Equity Interviews
To land a job in private equity you must start preparing very early on when you start your job in investment banking. On-cycle interviews begin just a few months into your first year in banking. Read the most common private equity interview questions and make sure you are well prepared before talking to recruiters.
Private equity career trajectory
The career path in private equity is very similar to investment banking.
- Analyst (2-3 years)
- Associate (2 years)
- Senior Associate (1-2 years)
- Vice President (3-4 years)
- Principal (3-4 years)
- Partner (endgame)
Example of how private equity firms get paid
General rule of thumb is that firms with more assets under management (AUM) pay substantially more than smaller AUM shops. There is so much economies of scale in private equity. You can manage more AUM, but not have to hire as many employees. There are $10Bn private equity firms that only have 40-50 employees.
The economics of a private equity firm are extremely lucrative. Most funds these days charge 1.5% management fees annually and 20% carried interest. This means that for a $1Bn private equity fund, they clip $15MM in fees annually right off the bat to fund operations and then keep 20% of the profits.
There is usually a 6% hurdle before a fund can take any cut of the profits, but then there is a catch up where the private equity firm then gets the rest of the profits to get their 6% before splitting the remainder 80/20. All in, the math on the carried interest usually works out to be an 80/20 split of the profits.
Private equity carried interest
Think about how crazy these economics are. A $1Bn private equity fund will have about 15 employees: three Partners, three Principals, three Vice Presidents three Associates and a few people in back office. Assuming the fund makes a 2.0x return on invested capital, then the profits of the fund are as follows:
In a firm of 15 people, 12 of them get some percentage of the carry. A vast majority of the money goes to the partners of course. The Principals / VP get a good slice and the Senior Associates / CFO get a small cut. There is a reason why private equity partners are extremely wealthy – notice how crazy the amount of money they get if the fund does well.
Now usually carry doesn’t get paid out until a fund exits a deal and makes a good return. Private equity funds are usually ~8 years long (4 years investment period 4 years harvest), so you could go years without receiving a carried interest payment.
That said, if you stay at a fund for a long time, you can get carry in multiple funds that overlap with one another.
Private equity bonus structure
Given private equity funds also charge a management fee, annual bonuses are still paid to their employees. Using the example above, a 1.5% management fee is $15MM a year in revenue for the fund which only has 15 employees. That is $1MM in revenue per head every year right off the bat.
Even if the fund makes no money on its invested capital, everyone at the firm is still extremely well paid. Sounds unfair doesn’t it? But that is just how it is given private equity firms have done very well over the past 40 years. Of course, if the latest fund doesn’t generate a good return, then it will be extremely hard to raise another fund.
Here is the breakdown in annual compensation at each level in private equity:
Analyst salaries and bonuses ($75-95K Salary + $50-75K Bonus)
- Most private equity firms do not recruit analysts out of undergrad, but there are some that do. Expect pay to be similar to slightly lower than investment banking compensation at the analyst level. At this level, bonuses are standardized and there won’t be more than a 10-20K difference just like in banking.
Associate salaries and bonuses ($115-125K Salary + $100-200K Bonus)
- People who break into private equity usually join at the Associate level after doing a few years in investment banking. The Private Equity Associate position is what most investment bankers dream of. Breaking into the buyside is all junior bankers ever talk about.
- Expect compensation to be in the ~$250K range for most private equity associates. Depending on how big the firm is, you could get paid more. A lot of the “mega funds” like KKR, TPG, Blackstone, Apollo, etc. pay $325K+ all-in after just two years in banking.
Senior Associate salaries and bonuses ($150K Salary + $150-$250K Bonus)
- After two years as an Associate, you become a Senior Associate. You will be ~26-27 years old and start contemplating whether this is what you want to do for the rest of your life. This is when most people leave the industry, either because they couldn’t make it to the Vice President level, want to switch careers to corporate or hedge fund, or they go back to business school (you should really think about whether B-School is worth it).
- Expect pay in the mid $300K range all-in at most places and in the $400K+ range at mega funds. At some places, especially at the smaller shops that can’t pay high cash compensation, you will start to get a little bit of carry in the fund. Don’t expect it to be a meaningful amount at this level, especially because it takes a long time to vest.
Vice President salaries and bonuses ($150-$175K Salary + $200-300K Bonus + Carry)
- If you make it to the Vice President level at a good private equity firm, then the compensation can start to get extremely lucrative. If you break into the buyside after a few years of banking and climb the private equity ladder, you could become a Vice President by the time you are 28/29 at the earliest.
- Compensation at these levels really varies widely depending on the fund’s size. At a decent $2Bn+ fund and good fund performance, you should expect ~$350-$500K in cash compensation and a potential $2-3MM in carry over 4-8 years if the fund makes a good return (but again, don’t rely too much on the carry as it takes a long time to vest and is not guaranteed).
Principal salaries and bonuses (All-in $500K-750K+ Carry)
- If you think making it to Vice President is very hard, imagine trying to make the next leap to the Principal level. Usually those who reach this level have a ton of deals under their belt, know what they are doing, and have relationships where they can start sourcing deals themselves.
- Even though your cash compensation at the Principal level seems to be an insane amount of money, your carry has the potential to be even more ridiculous. If the fund has a good performance, expect your carry to be ~$5MM at the smaller funds to ~$10-15MM at the larger shops.
Partner salaries and bonuses
- This is the end game. Unless you joined a large fund that has a lot of room for upward mobility, it is extremely hard to reach the partner level. This is true for any industry of course. To become partner, you have to prove that you can source good deals and have a good track record of performance. Once private equity professionals reach closer to the top, they team up with others and start raising their own funds.
- Compensation at the Partner level is literally all over the place depending on the fund size and performance. This is where you can make F**K You kinds of money.
Middle market versus mega fund private equity salary and bonuses
Like I mentioned before there is a big difference between what you can get paid at a middle market private equity firm versus a mega fund. At the Associate level, it is ~$100K difference in compensation. At more senior levels, it becomes an even bigger difference especially because the carry at a larger fund is much more meaningful.
If you wonder why that is, it is entirely because of the economies of scale in this business. The size of a fund can get bigger and bigger without having to add as many employees. You usually just go out and chase bigger deals. If you do the carried interest math shown above on a $10Bn fund, you can see how much more money a large fund can make.
So bigger the fund = higher pay. That said, don’t expect the lifestyle to be better. Expect to work a lot more on average at all the mega funds versus middle market.
Hedge fund versus private equity versus venture capital
If you want about the differences between all the various buyside jobs, then read the Differences Between Private Equity, Hedge Funds and Venture Capital. In terms of compensation, it is somewhat similar across all the industries. Most operate under a 2/20 model these days, except the 2 is now going down to 1 or 1.5% given how crowded the industry has become.
Out of all the different buyside jobs, private equity provides the most stable compensation structure where you are guaranteed a set bonus each year. If you read my article on Hedge Fund Salaries and Bonuses, you will see that hedge fund pay is extremely volatile and completely dependent on a fund’s performance.
I know multiple hedge fund analysts who did not get paid more than a base salary of $150K because the fund did not have a good year. Of course, at larger funds, this isn’t much of an issue as the management fees cover some level of bonuses for all employees.
Venture capital is similar to private equity, but don’t expect compensation to be as lucrative as private equity or hedge funds unless you are at one of the top shops.
Don’t pay too much attention to compensation
Even though this article talks about how lucrative a career in private equity is, don’t pay too much attention to it. At the end of the day, if you don’t like what you are doing, you will not be successful at it and you won’t make it to the top.
A life in private equity is still one that is very stressful and where you have to sacrifice a lot on the personal side to do well.
There is a misconception that always goes around junior bankers that think the buyside is the promise land where you work less, work on more meaningful things, and get paid more. Yes, you will get paid more especially once you reach VP/Principal level, but you will also continue working a ton.
So be prepared to make the work/life sacrifices necessary if you want to make it big in private equity. Sure, there are a lot of lifestyle middle market private equity firms out there, but at the end of a day, investing money will always be stressful and hours will continue to be long especially when in a middle of a deal.
Filed Under: Career, Private EquityTagged With: private equitySours: https://www.buysidehustle.com/private-equity-salary-and-bonuses-from-analyst-to-partner/
Career In Private Equity – In the present-day scenario, where the markets are dynamic and evolving constantly, it is only a matter of time before a new kid draws the spotlight of attention from the existing players by its entry. ‘Private equity, the jargon has created a lot of buzz over the years, making it the ‘New kid’ in the investment town. It sure is giving a tough run to the investment banking sector and other investment alternatives. The usage of this term has been in heavy rotation in recent years. WHY, you ask? Instead, what you should really be asking is ‘’WHY NOT?’’, the introduction of private equity firms has been nothing but a win-win for both the players across the table. In fact, for all the players on the table, so to speak – The investors, the asset management companies, target companies, the stakeholders in the process, and of course, the private equity themselves, and the people indirectly or directly benefitting from them such as through exchange-traded funds or mutual funds. The private equity firm earns better than public equity markets, and those invested in private equity firms earn reasonably well than an average investor with other investing alternatives. Now, you can fairly imagine what private equities with deep pockets would earn like!
It is undoubtedly the most sought-after stream to get into, and it is indeed receiving the hype it deserves through all the success it is gaining. Before getting thoroughly and properly briefed about what private equities really are, in the forthcoming sections, let us have ourselves address the same in layman’s terms for better understanding. So basically, private equity firms are attractive investment vehicles that utilize their own funds or investment chipped in from investors and search for good investment opportunities, it could be in real estate, venture capital, leveraged buyouts in a fund of funds, etc. this is done through auctions against the other competing bidders, after buying whatever they were looking for, the PE remains invested for long-term and makes big bucks through a profitable exit strategy which could be through – Initial public offer, resale, or other alternative options.
Let’s understand this better.
Now, What Is Private Equity?
‘Private equity,’ ‘Private’ because it acquires private firms or delisted public companies, and ‘Equity’ because it focuses on equity investments. The concept of private equity has grown so much into prominence that investment banking companies such as ‘Goldman Sachs’ and ‘Morgan Stanley’ also have private equity arms.
PE firms are mostly not listed publicly. In few cases, some private equities, such as business development companies (BDCs), offer publicly traded stock giving the average investor to own a slice of the private equity pie. For example, Blackstone Inc. trades its shares publicly on NYSE. So, private equities are investment companies that have funds of their own such as from the capital, management fees, initial investments, and the investments from the outside investors such as pension funds, high net worth individuals (HNIs), qualified institutional buyers (QIBs), venture capitalists (VCs), Investment banks and other investors. Private equity firms generally specialize in a niche, which could be industry-wise, stage of maturity of the company wise (such as in starting stage in case of start-ups or later stages), seed investment-wise, etc. Now, these funds that the PE owns are applied prudently and with careful research and analysis to acquire investments that best fit the company’s portfolio.
These investments can be in the form of distressed funding, leveraged buyout, real estate, fund of funds and, venture capital. These are purchased via auctions where they face huge competition from other investors such as the mergers and acquisitions companies. Once the target firm is acquired, though they are invested in them for the long term, they are not involved daily. Their degree of involvement in the target firm is directly proportional to their stake in that target firm. That is – the higher the degree of stake, the more the involvement and vice-versa. Unlike the ‘Hedge funds,’ who remain invested for short-term on an average of 2-3 months and exit by selling the shares at a profitable margin at the right opportunity. Moreover, the hedge funds are unlikely to invest in non-public companies.
Whereas the private equity firms invest in non-public companies, they also invest in public companies in certain cases and de-list them later during the investment period. Unlike hedge funds, private equity firms remain invested for the long term for the average period of 5-10 years. The minimum period is 2+ years depending on the time, the situation, the company acquired, and the liquidity requirements. The PE company acquires more than 50% of shares of the target company (the company that is being acquired.), the first step after acquiring the stake is de-listing the target company – because by taking public companies private, the PE firms remove the constant public scrutiny of quarterly earnings, reporting and other compliances which then allows them and the acquired firm’s management to take a long-term approach in bettering the fortune of the company.
The next step is ‘Change of management’ was required according to the suitability there are changes in the composition of management of the company, the PE, and the management of the company collectively work towards increasing the EBITDA (Earnings before interest, taxes, depreciation, and amortization) during the investment period. And in most cases, the management’s compensation is tied with the firm’s performance, incentivizing the management to track the company’s financials exponentially.
The PE also makes an effort to progressively improve the financial performance of the acquired company through rendering various services such as advisory, formulating, implementing controlling and monitoring strategies, consulting, operations, and financial management. By building the company and its financials internally and scaling up its market value, the PE with a good opportunity and profitable exit strategy sell the stake in the investment by resale/IPO/ alternate options.
The steps mentioned above might not be necessarily executed in the given order as it is ‘Relative’ to companies and not an ‘Absolute’ protocol.
Structure And Composition Of A Private Equity Firm
A private equity firm could be of two types depending on the business requirement. It could be in the form of – 1) ‘Limited partnership’ or 2) ‘Closed-end funds.’ Limited partnerships are usually practiced in the United States, and Closed-end funds form of PEs are generally practiced in the European countries.
Under a limited partnership, there are two kinds of partners – the ‘General partners’ and the ‘Limited partners.’ General partners are those with full liability, and the limited partners have limited liability on their part. The functions of general partners include management of funds, post-investment advisory, target company portfolio selection. They also charge the partners a management fee and manage the portfolio and investment in other companies.
The compensation structure in the limited partnership is that of ‘2% -20%,’ but the norm can vary according to the company’s framework. ‘2% – 20%’ scheme is where the 2% denotes the management fees collected from the partners, and 20% denotes the share of profits to general partners. The limited partners receive from the residual proceeds that are left after what is given to general partners. That is, limited partners receive ‘All proceeds – 20% to GP’. The general partners have 1st preference over the limited partners. This could sometimes be beneficial for limited partners and sometimes not, depending on the company’s degree of profits. Therefore, the general partners face less risk than the limited partners in the case of returns.
THIS IS HOW A 2-20% COMPENSATION STRUCTURE LOOKS LIKE:
NOTE – HURDLE RATE ONLY COMES TO THE PICTURE WHEN THE SAME IS AGREED UPON DURING THE PARTNERSHIP AGREEMENT. IT DEFINES A CERTAIN MINIMUM RATE OF RETURN THAT NEEDS TO BE ACHIEVED BEFORE ACCRUING CARRIED INTEREST TO GENERAL PARTNERS.
Close End Funds
The closed-end funds have the same compensation scheme as the limited partnership structure. Here, in this case, there is a newly created entity in which the investors such as high net-worth individuals, qualified institutional buyers, venture capitalists, and other sorts of investors invest, and an ‘asset management company (AMC) is called to sign a management contract to manage the newly established PE firm. The first phase that this newly established company undergoes is the formation phase, which lasts up to 2 months to 3 years, and then comes the investment phase, which lasts up to 5 years. The investment phase is where predominantly most of the transitional activities get done, such as identifying target companies, optimizing the company’s portfolio, change of management, etc. Next is the ‘Divestiture’ which could last up to 5 years or so. This is where the market volatility is taken into consideration. The general state of the economy is studied. After all the research and analysis are done, the hunt for finding the right buyer begins. And the fund proceeds from the sale are distributed among the asset management company, investors, stakeholders, general partners, and limited partners in case of a limited partnership.
Career In Private Equity Firms
Private equity is indeed an enticing career to take up. Three vital factors help back up that statement. These factors act as a barometer to measure the viability of a certain career – 1) Payscale, 2) knowledge and experience derived from the job, and 3) investment of time (work hours). And to your delight, private equity firms sufficiently satisfy all three criteria, making it a fascinating and very lucrative career. They don’t need to work as long as those at investment banking companies. The work hours are less as compared to the IB and other finance industries in private equities. The work hours reduce as you go up the hierarchy. Even the associates are paid high amounts at their age! And the bonuses have the scope to scale up to 150% of base salary easily.
The two key compensation trends in the private equity industry are:
- Salaries and bonuses for private equity are growing and at a faster rate than in the overall market.
- Carried interest is increasingly being distributed downwards and upwards in the hierarchy in the firm.
The pay in private equity firms drastically increases from one year to the next. For instance, the average increase in 2019 in an analyst’s pay was – $1,00,000 in the first year to $1,30,000 in the second year to $1,60,000 in the third. Which are, mind you, 10-20% higher than an investment banking analyst’s average pay. In 2019, the managing partner’s pay ranged from $1.1 million – $ 3.7 million for companies with greater than $20 billion in AUM (Asset under management). And, for directors and partners of companies with AUM greater than $5 billion, it ranged from $5,96,000 – $2.2 million, and the mean cash compensation for partners was hovering around $5,92,000. And likewise for associates it ranged from $1,70,000 – $3,15,000.
Factors Determining The CTC In Private Equity Firms
- THE FIRM SIZE – Apparently, the firm size plays a crucial role in determining the CTC of a candidate. Now, if you are at the top megafund, you can expect to get paid big. Needless to state, the prominence and size of the firm also influence the pay up to some extent. The big players in the private equity industry include ‘The Carlyle Group Inc.,’ ‘KKR & co. Inc’, ‘The Blackstone Group Inc.,’ ‘TPG Capital’ so on and so forth make quadruple times more than any other, and eventually, the staff reaps the benefits of its goodwill. ‘Apollo Global Inc.,’ ‘Brookfield Asset Management’ and ‘The Blackstone Group Inc.’ is the highest paying private equity firm. Generally, it is not a market standard to pay carry (the portion of profits in the fund) to associates. But big firms with assets under management of $1.5 billion pay up to 18% carry to their associates.
- EXPERIENCE AND QUALIFICATION – Generally, it is tough for an undergrad or graduate/ fresher holding just an associate’s or bachelor’s degree to get into a private equity firm. The private equity firms are generally recruiting those with master’s degrees or postgraduate degrees with experience or at the least a combination of bachelor’s degrees + 3 years of experience in the finance industry. The asking price increases with experience. In most cases, it is observed that the private equity firms generally recruit an ex-investment banker or ex-consultants or those running start-ups as they are no strangers to the finance industry and as they have requisite working knowledge and experience in skillsets such as financial modeling, financial valuation, investment judgment, etc. More the experience, the higher the position on the hierarchy – A person with 2-4 years of relevant working experience could be promoted to the position of an associate, similarly with 5-8 years of experience, you are promoted to the role of vice-president, 9-15 years could fetch you the position of a director or a principal, and with 15+ years of experience you could see yourself being promoted to the position of a partner!
- ASSET UNDER MANAGEMENT – The AUM of the company in 90% cases is directly proportional to the pay. Asset under the management of the private equity firm gives us an idea of the magnitude of the firm, its assets, and its size—the greater the AUM, the bigger the paycheck, and vice versa.
- COUNTRY LOCATION – To some extent, the country’s location also plays a pivotal role in differential pay structure. For instance, normally, only partners and positions up in the hierarchy are entitled to carry interest (a share in the profit) according to industrial norms. But, in 2019, 30% of the North American firms and 37.5% of European firms allocated carry to non-partner admin or support staff. And the workers of PE firms in APAC and middle eastern countries were deprived of the same. The analyst in the US earns $86,000, whereas the same analyst would earn just about $57000 in Asia. Similarly, the pay of an associate is way higher ($1,07,000) in the US than what an associate would earn in a European country ($82,000). But, on the contrary, the partner in a European country earns much higher than what a partner would earn in the states. The same is the case with a Sr. associate and director/principal being paid the highest in the US and lowest in Asian countries.
- POSITION IN THE HIERARCHY – Position in the hierarchy is another important factor that has a huge impact undoubtedly for obvious reasons on the paycheck of an individual. The upper side of the hierarchy tends to have bigger paychecks than those at the bottom. The private equity firms do not have a complex hierarchy or a massive number of members or employees under it, so the ones under it make much more than the others as the profits are divisible by a smaller group of numbers. Hence obscene returns are bound to happen. The hierarchy in PE firms, starting with the junior level, analysts, then comes to the associates and the Sr. associates. At the mid-senior level, you have vice president, president/director, and then at the very top of the hierarchy, managing director or partner.
- THE ANALYSTS – An analyst works on an average of 65 hours a week. He is unlikely to receive a carried interest. He is entitled to receive an average pay, including that of bonus and salary around $1,00,000 -$1,50,000. An analyst’s duties include reporting to the associate or immediate senior and analyzing the company’s investments and portfolio, setting up conference calls, assisting associates, etc. They usually get promoted after 2-3 years.
- THE ASSOCIATES – An associate works on an average for 60 hours weekly, even he is unlikely to receive the carry, and his average pay range exists between $1,50,000 – $3,00,000. The duties of an associate include research, due diligence, financial modeling, report writing, reviewing and summarizing confidentiality information memorandum, etc. Their promotion time range is equal to that of analysts, that is, 2-3 years.
- THE SR. ASSOCIATES – A senior associate is estimated to work for about 65 hours weekly. He is entitled to receive a small portion in the carry and is also entitled to a pay range of $2,50,000 – $4,00,000. The duties of a Sr. associate include guiding his subordinates, reporting to the vice-president and president as the case may be, portfolio management etc. They also have a similar duration of promotion time, that is, 2-3 years.
- VICE-PRESIDENTS – A Vice-president who comes under the mid-senior cap works weekly roughly around 55 hours and is entitled to grow a portion of carrying and a pay range between $3,50,000 – $5,00,000. His duties include supervising associates, assist MD and partner, negotiating deals, establishing and maintaining relationships with investment bankers, consultants, and financial professionals who can be a source of leads for investment opportunities. Their duration of promotion time is 3-4 years.
- DIRECTORS/PRESIDENTS/PRINCIPALS – They have quite similar duties to vice presidents and greater leadership responsibilities. They are entitled to a large portion of carrying. And with a promotion time of 3-4 years. They are entitled to a pay range of $5,00,000 – $8,00,000 on an average—the estimation of weekly working hours of principal hover around 50 hours.
- MANAGING DIRECTOR/ PARTNERS – They are the lifeblood of PE firms. Their weekly estimation of working hours is around 40 hours. This is the highest one can reach in a private equity firm; hence promotions are not applicable after this stage. They are entitled to the biggest portion of carrying (upward of 3 million dollars) and are entitled to a staggering pay range of $7,00,000 – $2 million. Their duties are ultimate and have a ripple effect and determine the direction of the firm. Their job includes – making final decisions, structuring investment deals, actively solicit investors, etc.
THE BOTTOM LINE
The private equity industry is worth betting on from the standpoint of every position on the hierarchy. As not only is the career highly lucrative, but the learning curve’s growth is much faster. With on-the-job training and priceless experience at the PE firm, the individual’s skillsets are honed, and he will have a myriad of options open to him in the finance industry as someone who’s had his experience come from a PE industry. Hence, if you find an opportunity, join that in a heartbeat!
Also read How to Become a Private Equity Associate in 2021?
Private Equity Salary and Bonus Data by Position
Full Private Equity Industry Report
The table above is an example of private equity salaries at various levels of seniority. You can gain access to thousands of data points across hundreds of private equity firms in the WSO Company Database.
Private Equity Pay and Carry
From pre-MBA associates to managing directors, private equity pay is traditionally heavily weighted toward the bonus portion as well as carry. Carry or "carried interest" represents the percentage of the upside return that the senior private equity professionals get to keep in the case where returns exceed a certain threshold.
Let's quickly run through an example to explain how carry works and why it can be such a large portion of the compensation at private equity funds.
- Assume carry is 20% for a certain fund that has raised $1 billion (the most common
- Assume things go well and the investment professionals of that fund double the
"value" of the fund through smart acquisitions and exits, so now they have returned $2
billion to their limited partners (LPs).
- The PE fund is entitled to 20% of that incremental $1 billion of value they helped
create for the LPs. In other words, a whopping $200 million (if this fund only has
20-30 investment professionals, the guys at the top that own a majority of it can make
a significant windfall if their funds perform).
In practice, the exact amount that the carry portion is worth will depend on the amount of time it takes to generate returns over and above some hurdle rate (like an 8% annual return), so it's more complicated, but you get the idea.
At the pre-MBA associate level, hours are usually slightly better than an investment banking analyst, except at some private equity mega-funds. Most pre-MBA associates start after two years in investment banking or consulting and receive their first private equity bonus around June to July, approximately one year after they start working. It is rare for pre-MBA associates to receive carry, but it does happen on occasion.
Private Equity Bonus for Senior Investment Professionals
The compensation for Vice Presidents, Directors, and Managing Directors is much more variable, but the salary and bonus is usually much more of a function of the fund's performance since a lot of the compensation is tied up in carry.
See below for an estimated range of current private equity salaries.
Private Equity Compensation:
- Analyst/Associate - First Year: $100K - $250K
- Analyst/Associate - Second Year: $150K - $300K
- Analyst/Associate - Third Year +: $170K - $350K
- Vice President: $300K - $800K
- Managing Director/Partner: $500K - $10MM+
(Again, please note that, at the higher levels, private equity compensation comes with
carried interest, which is directly related to your firm's profitability and may
result in a large payout.)
These private equity salary figures are an approximation and rough range based on the user registration data on Wall Street Oasis as well as the thousands of discussions on PE compensation that the community has had at these levels.
For more details on the specific pay at certain firms, please check out our private equity industry report. Just by adding one submission you can unlock all of this data (sample below) along or pay a small monthly subscription.
Interested in Private Equity? Here's What You Need to Break In
Private equity is recruiting is ten times more cut-throat than anything you've ever experienced before. If you want to break into private equity, you need to be ready for the technical aspects of the interview. The WSO private equity interview course is worth well more than the price of admission.
PE Interview Questions
How to Become a Private Equity Associate
Many investment banking analysts look toward private equity (PE) as the next step in their finance careers. Private equity firms are smaller than investment banks, so there are fewer jobs and competition for these positions can be intense.
Private equity firms hire their entry-level staff as associates and typically expect at least two years of experience as an investment banking analyst. Similar to investment banks, associates at private equity firms can work extremely long hours, especially during deal closings.
- Private equity (PE) investment involves acquiring private companies, often turning around their management and business model, and selling them for a profit.
- Private equity associates work closely with client firms or prospects to conduct due diligence.
- PE professionals must raise capital from outside investors, typically wealthy individuals or organizations.
- Successful associates can earn six-figure incomes in a matter of years.
Most companies start out as private, but a public company can also sell out its public shares and go private if it finds the benefits to be greater. One of the biggest differences in private versus public equity is that private equity investors are generally paid through distributions rather than stock accumulation.
Private equity investors usually receive distributions throughout the life of their investment. Private equity firms mostly buy mature companies that are already established. The companies may be deteriorating or not making the profits they should be due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Venture capital firms, on the other hand, mostly invest in startups with high growth potential.
Private equity firms mostly buy 100% ownership of the companies in which they invest. As a result, the companies are in total control of the firm after the buyout.
From the perspective of a nascent company, private equity often means having to please a smaller clientele. It also means fewer restrictions and investment guidelines from regulators including the Securities and Exchange Commission.
Private equity firms attract capital from high-net-worth individuals as well as institutional investors like foundations, endowments, and pension funds. They invest the capital in privately held companies by either buying companies outright or by investing capital and partnering with the company’s management. Private equity firms make money from the fees they charge the investors and from the carried interest from investments.
Notable private equity firms include TPG Capital, Warburg Pincus, Carlyle Group, Kohlberg Kravis Roberts, Blackstone Group, and Apollo Management. Most firms are small to mid-sized investment organizations that can range from hundreds of employees to a two-person shop.
Private equity firms are generally much smaller than investment banks and have a correspondingly flatter hierarchy. Entry-level private equity associates can work closely with firm principals and partners on every step of a deal. Associates can feel a great sense of satisfaction in seeing a deal through from its beginning to completion.
Duties as a private equity associate can include the following:
- Analytical modeling: The primary function of the associate is to provide all analytics required for the principals and partners to make an informed decision about a deal. Common tasks include preparing preliminary due diligence reports and modeling with growth forecasts.
- Portfolio company monitoring: Associates are usually assigned portfolio companies to monitor and must maintain up-to-date financials.
- Reviewing CIMs: CIMs or confidential information memorandum are documents investment banks use to provide data about new investment opportunities. Associates receive the CIMs, screen them for potential opportunities that fit within the firm's framework, and provide a simple one-page summary for the senior team.
- Fundraising: When new funds are being formed, associates assist with preliminary fundraising while senior executives handle most of the relationship and client interface.
Most private equity associates stay in their positions for two to three years before being considered for a senior associate. A successful career path at a private equity firm may look like the following:
- Senior Associate (two to three years), to Vice-President/Principal (two to four years), to Director/Partner
Education and Training
Candidates should have a bachelor’s degree in a major like finance, accounting, statistics, mathematics, or economics. Private equity firms do not usually hire straight out of college or business school unless the student has previous significant private equity internships or work experience.
The most important qualification to become a private equity analyst is two to three years prior experience as an investment banking analyst. Some firms also hire former management consultants. Getting an interview takes both a strong network in private equity and knowing the right headhunters. Most private equity firms use headhunters who serve as gatekeepers to these jobs.
Salary and Compensation
Total compensation varies widely because, on top of a salary, associates receive a bonus that reflects closed deals and income generated from deals. For entry-level associate positions, the bonus percentage is often a fixed percentage and less variable than it is for the upper-level managers.
- First-year associate: $50,000 to $250,000, with an average of $125,000. An average first-year salary may be $81,000, with a bonus of 25-50 percent of base salary.
- Second-year associate: $100,000 to $300,000, with an average of $135,000.
- Third-year associate: $150,000 to $350,000, with an average of $160,000.
The Bottom Line
Private equity associates participate in deals from the beginning to close. Even entry‑level associates are an integral member of the team and need to have very strong analytical and leadership skills.
Because the work is satisfying and the financial reward is great, landing one of these sought-after positions is difficult. Starting as a summer intern is perhaps the most straightforward path, but many associates also enter the field from investment banking or management consulting.
And salary private equity hierarchy
Let’s take an example, your firm raises $1.5 billion and turns it into $3 billion. To be more specific, in year 5, your firm successfully turns the initial investment into $3 billion.
The distribution split agreement between LPs and the GP is 80-20. In year 0, the LPs contributed $1.3 billion in total, while the GP contributed $200 million. The hurdle rate is 8%, so the fund needs to earn an 8% IRR before it can earn anything else.
This hurdle rate seems to be the pressure on the GP side but it’s a key tactic helping the funds to call for capital from LPs. Investing in illiquid assets, such as private equity firms, is a risky decision to make so they expect higher return. If the fund’s IRR is only 5%, the LPs will skip private equity and invest in bonds or other industries. After the LPs receive proceeds up to the 8% IRR, the GP can earn its 20% profit.
Back to our previous example, we will demonstrate here how the funds are distributed in Year 5 with the following assumption:
- All the capital was successfully raised in Year 0 and earned back in Year 5 (It is not often the case in reality. That capital can be raised by phases, not at once all in Year 0)
- The split between LPs and GP is 80/20
- The hurdle rate is 8%, meaning that the firm has to reach a minimum 8% IRR before getting any split
Turning a $1.5bil investment into $3bil by year 5, this private equity firm reaches 15% IRR, which is above the hurdle rate.
At this point, someone can jump in and calculate quickly the profits of LPs and GP
- Return profits: $1.5 bil = $3 bil – $1.5 bil (investment in Year 0)
- LPs’ profits: 80% * $1.5 bil = $1.2 bil
- GP’s profit: 20% * $1.5 bil = $ 300 mil
All the numbers are right. However, we have to use a different approach, which involves the principle that LPs get proceeds up to 8% IRR first.
- As IRR is 8%, LPs expect that the initial $1.3bil investment will create $1.910bil at the end of 5 years
- Investment profits for LP at 8% IRR is: $1.910bil – $1.3bil = $610mil. They also got back their initial investment, which was $1.3 bil
- Because GP can deliver the minimum IRR, GP will receive $153million to catch up with the split 80/20 ( $153/ ($153 + $610) = 20%)
- Remaining proceeds from the investment profits are $3bil – $1.3bil – $610mil – $200mil – $153 mil = $737 mil
- The split 80/20 is applied again with the remaining. Hence, LPs get $737mil * 80% = $570mil; GP get $737mil *20% = $147mil
- LPs receive their initial investment of $1.3bil and $1.2bil profits in Year 5. They earn a 1.9x multiple and a 14% IRR
- GPs get their initial investment of $200mil and $300mil profits in Year 5. Finally, they get a 2.5x multiple and a 20% IRR
From this example, although contributing less, GP, or the PE firm, gets higher multiples and IRR than those of LPs. Carried interest can be very lucrative but it’s quite dangerous and stressful. If things go the other way, for example, if the fund can grow only $1.8 billion at the end of 5 years, the IRR will be 7%, less than the minimum of 8%. Since it’s below the hurdle rate, the GP earns nothing despite its contribution of $200 million in the beginning. Each LP of the firm will lose millions of dollars if there are other better investment options in the market.
Private Equity Investment Professionals
Like investment banks, Private Equity firms typically have a fairly rigid seniority structure with big differences in experience level and responsibilities from top to bottom. In general the senior-most professionals are responsible for deal sourcing, relationship management, and investment decision making, while the junior-most professionals carry the brunt of the analytical workload. However, unlike investment banks, Private Equity firms tend to employ a fairly flat hierarchy structure with fewer layers. This is, at least in part, because Private Equity firms tend to be much smaller than investment banking divisions at major banks. As a result, junior professionals will tend to have much more interaction with senior professionals, fostering much more opportunity to work directly with and learn directly from the most seasoned professionals in the firm.
Here is a brief description of the primary roles in the Private Equity firm hierarchy:
ASSOCIATE: Pre-MBA associates are typically the most junior professionals at the majority of PE firms. The associate handles most of the financial modeling and initial due diligence for investment opportunities, while assisting with the management and monitoring of portfolio companies as well as sourcing deals and supporting transactions. More day-to-day details on the associate’s role are provided later in this guide.
A majority of Pre-MBA associates (especially in the US) are hired for a two-year to three-year program. At the completion of the program, associates are typically expected to attend a top-tier MBA program. Smaller firms will often promote associates to senior associates, and those firms in general tend to provide more opportunities for internal promotions to more senior roles. Such firms include TA Associates and Summit Partners. On the flip side, large LBO firms generally have a more regimented hierarchy and firm structure where the roles are more defined for associates, and where there are limited internal promotion opportunities and limited opportunities to get involved in deal sourcing. Some private equity firms do recruit for private equity analysts out of undergraduate school, although this is uncommon. Most PE hierarchies start at the Pre-MBA associate level, and associates will usually have 2-3 years of prior experience in investment banking or (sometimes) strategy consulting. Firms that do hire analysts straight out of college will offer those analysts roles similar to those of the associates, but the analysts will tend to focus more on logistical tasks, such as participating in conference calls, reviewing data and legal documents, and supporting the associate and vice president with internal investment materials.
VICE PRESIDENT/PRINCIPAL: Vice presidents and principals typically manage the daily responsibilities of the deal teams and work closely with the senior partners of the firm on strategy and negotiations. Professionals in these roles are also expected to generate investment opportunities and potential acquisition ideas. Compensation for a VP or principal varies depending on the size of the PE firm. PE firms will almost always offer some amount of carried interest in the fund to employees at this level.
VPs/Principals manage internal due diligence streams by themselves and have a large role in negotiations. They typically have an MBA degree from a top-tier business school, and one of their main responsibilities is to source investment opportunities by cultivating and maintaining relationships with investment bankers, consultants, and others. VPs/Principals also usually manage the pre-MBA associates and often play a large role in the negotiation aspect of the transaction process.
MANAGING DIRECTOR/PARTNER: Managing directors and partners are the most senior members of the firm and are the ultimate decision makers. They interact directly with the management of portfolio companies, target companies, and investment banks, they conduct negotiations, they source deals, and they deal routinely with the PE firm’s Investment Committee. A typical managing director receives significant compensation in terms of carried interest in the PE fund(s).
Typical Private Equity Career Path
A typical career path for pre-MBA and post-MBA Private Equity professionals is illustrated below.
Typical Day of a Pre-MBA Investment Associate
Private equity is an extremely complex business, and an associate’s daily responsibilities vary tremendously depending upon the firm the associate works for as well as what stage of the deal process the associate is currently working on. That said, one can paint a fairly broad picture about what an associate’s responsibilities look like overall. Here is a timeline for a “typical workday” for you as a private equity associate:
8:00 a.m.: On the way into the office, you read various news sources, such as the Wall Street Journal or Investor’s Business Daily, and check emails that you received the previous night and this morning to make sure you are prepared to take care of any pressing tasks as early as possible.
8:30 a.m.: You arrive at the office and go through any unaddressed emails. For example, you might see that you have received an investment teaser from a boutique investment bank on a potential sale of a retail chain. Given that you focus on consumer products and that this opportunity fits your fund’s investment criteria, you decide to share the idea with a vice president in your investment area to discuss whether the opportunity is attractive and worth pursuing for further consideration.
9:00 a.m.: You pull up an LBO model template for a different investment opportunity and input a new base-case scenario that a senior member of the investment team would like to review this morning. You have been working on this investment opportunity for the last several weeks and are getting ready to submit a Letter of Intent (First Round Bid) to possibly acquire the relevant business.
11:00 a.m.: You make phone calls to various contacts on the buy-side and on the sell-side to catch up on any news that came out that morning and discuss any new events occurring in the industry or sector you cover.
12:00 p.m.: You catch up over lunch with a former colleague that works at a private equity firm where your firm occasionally co-invests.
1:00 p.m.: You send the updated LBO model to the senior member and meet in his office to discuss your assumptions and the feasibility of the scenario. You notice that the IRR could be optimized using a different debt instrument, and you go back to your office to update.
3:00 p.m.: Given that you received that investment teaser in the morning, you decide to look for relevant sector and comparable company research reports to get a better sense of the available opportunity according to market conditions and research conducted by others.
4:00 p.m.: You receive an email containing the monthly profit & loss (“P&L”) of a portfolio company you are partly responsible for monitoring. You open up the financial model for the company and update the numbers in the model to reflect the actual results you just received and then send the model to the senior member of your investment team who also is responsible for the monitoring of that company.
6:00 p.m.: At the end of the business day, you receive a financial due diligence report for a potential investment that has been approved by your Investment Committee to pursue further into the diligence process. You go through the report and then summarize the findings in an internal memorandum that you have been putting together in preparation for final Investment Committee approval process.
8:30 p.m.: You complete the memorandum and decide to call it a day, have dinner, and go to the gym for a quick workout before heading home.←Monitoring & Exiting Private Equity InvestmentsPrivate Equity Resume→
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Private Equity Salary (Mega Funds)
Private equity is a very lucrative career. As an asset class, private equity has enjoyed tremendous success over the past decade. Investors around the globe continue to pile their money into private equity firms. Dry powder (i.e. available cash that private equity firms can invest) hit a record high of $2.5 trillion in 2019. There is a lot of money to go around.
Private equity firms buy companies. Then, they operate and try to improve those companies. Finally, they try to sell these companies at a profit. Private equity employees are compensated for making good investment decisions. The larger and more successful the investment, the more money there is to go around. Mega funds offer large salaries in part because they manage large quantities of money.
If you’d like to learn more about how to break into private equity, feel free to check out our Private Equity Recruiting Course.
The Private Equity Associate
The Private Equity Associate is typically the lowest ranking employee at a private equity firm. The Associate is typically a mid to late 20’s person with a prior background in investment banking, consulting, or other deal-related financial services.
In this post, we’ll do a benchmarking exercise of Associate pay at mega funds. It’s the easiest to try and standardize Associate pay because:
There is the greatest volume of Associates (they are at the bottom of the pyramid), so we have a lot more data to work with.
Associates generally don’t receive carry (i.e. a portion of profits in the fund), so we can just calculate cash and bonus salary to get to a decent answer.
People get dodgier about their salary as they get older, so there’s less transparency.
In short, if you’re at a top mega fund, then you can expect to get paid between $300-$350k per year.
This is meaningfully more than investment banking associates (except at Centerview). Similarly aged top hedge fund analysts will on average make a similar amount to Private Equity Associates, but there is going to be much wider variance across hedge fund salaries. Variance in salary is one of the key differences between private equity firms and hedge funds.
We’re going to start with the list of top funds that we outlined in our post on mega funds. These are the largest funds in the world. They manage the most amount of money and generally hire between 6-12 Associates globally every single year.
We’re going to consult our reliable friend, the H1B Database, which compiles the base salaries of all US employees under the common H1B visa. We lay out the lowest and highest figure we can find for the Associate position at each firm.
Base Salary: Most top Private Equity Associates are going to make between $120k and $140k for their base salary. This is what goes into your bi-weekly paycheck. Congratulations, you’ve almost already cleared what an Investment Banking Analyst makes!
Bonus: The bonus is a lot harder to standardize, but from my personal experience and that of my peers, the bonus range is typically around 150% of the base salary. This depends a lot on the fund performance, group performance, and your own performance. The bonus is a lump sum cash payment that is paid annually.
All-In Comp: When you combine the base salary and the bonus, you get your all-in compensation. I think this bonus % is a little bit on the conservative side and I would say an appropriate range is $300k to $350kall-in compensation as an Associate. As a separate data point, the chart below from GoBuyside compiles survey data they received. At fund sizes greater than $5B, the all-in compensation is on average $315k.
Apollo Global Management: Apollo Global Management is frequently reputed to be the highest-paying firm on the street in terms of all-in compensation, paying their Associates upwards of $400k per year. They have an enormous fund and have an incredible track record of success. They also have a reputation of being pretty intense, but hey, this is private equity we’re talking about.
Annual Raise: The Private Equity Associate program typically lasts 2-3 years. This is more anecdotal, but each year, you can expect between a $25k to $50k raise. This amount will balloon when you get promoted.
This is a great chart from GoBuyside that shows how your fund size really does impact how much you’re able to make. The bigger your fund, the more management fees you can get and the bigger the deals you can do. This is also why asset classes like VC and Growth are systemically slightly lower paying (they invest in smaller companies).
There are two other factors in private equity that can materially drive how much money you make: carry and co-invest.
Private equity firms are paid based on how much profit they can generate from their investments. They are given a portion of this profit, which is known as “carry”. The thing is, most associates don’t get carry. At mega funds, it’s essentially unheard of, and even at sub $1B funds, fewer than 1/5 of people get carry.
I think this is partially because the Associate position is relatively high attrition, and it’s annoying to give Associates carry when they might leave in the next year or so. Private equity fund duration can be up to 10 years and carry payments aren’t going to be received evenly over the course of a couple of years, so it’s tough to divvy up.
Private equity firms also have no incentive to give their precious carry to the Associate. It’s not the market standard and Associates already get paid a very high amount for their age.
Co-investing occurs when you can invest alongside the private equity firm into a deal or fund. This means that when the firm buys a company, you can throw in some money and get some equity in the business. If your fund does what a private equity firm is supposed to and returns 15-20%+ annually, then you might be able to grow your money quickly and safely by co-investing.
The ability to co-invest is theoretically pretty cool because a lot of mid-20s people aren’t going to have access to attractive alternative investments. Note that less than half of all funds even allow co-invest.
One important consideration is that co-investing will have the illiquidity issues that private equity as an asset class has. If you have a large payment coming up (e.g. business school, buying a house, etc.), it might be hard to have a lot of money tied up in a private market investment that you can’t sell out of.
All things considered, you’re going to make $300k to $350k at a top private equity fund as an Associate.
It’ll be interesting to see whether these salary levels are going to remain this high over the next few years. As more money flows into the asset class and more deals get completed, it definitely seems that way.