- Private Equity
It’s no secret that private equity professionals are well compensated, but what kind of numbers are we actually talking about? The industry is secretive and values confidentiality, so it’s often difficult to get good data. In this article we’ll break it down and let you know what private equity salary you can expect each step of the way, from associate through partner.
Just like any other job, junior members of the team will start on the lower end of the salary range, while senior members get the biggest numbers.
The table here shows average investment professional base salary and performance bonus dollar figures for the prior two years.
Can’t complain about pulling $300k at 25 years old (although every associate I know still does).
The great thing about PE is that you’re likely to see significant bumps in comp for each year you stay in the industry. As an associate, you’ll probably see increases of $25 – $50k per year.
After two to three years as an associate you’ll be up for promotion to senior associate or VP. You’ll get a big bump here and likely receive your first carry allocation (keep reading for more on this). After that you’ll keep seeing growth each year, with big step-ups at promotion to principal and MD/partner.
According to Odyssey Search Partners, a private equity headhunter, PE cash compensation is up about 15% year-over-year. Although there may be some broader economic slowdown, nothing has dragged down PE comp yet.
A continued tight market for talent, combined with large recent fundraises, has helped push compensation to new levels. In short, it’s a great time to be in private equity.
PE comp also tends to be more stable than investment banking. Because private equity salaries are tied to the fund size and management fees, they don’t fluctuate on a year-to-year basis like investment banking fees do.
This means there might not be the immediate upside in banner years, like investment banking’s 2021, but there is also a lower likelihood of getting a donut (parlance for a bonus of $0).
Of special note, PE analyst comp has really jumped up year-over-year (25%+) as junior pay across the Street has been bumped up, led by the banks. I’m guessing investment banking analyst bonuses won’t be anything to write home about this year, but private equity analysts should be fine.
One thing that’s important to note is that investment professional compensation can vary significantly by the size of the private equity fund. This is because base salaries and cash bonuses are paid out of annual management fees, which are typically a percentage of assets under management.
The $10B fund will pursue larger deals, but a bigger deal doesn’t necessarily require that much more work than a smaller transaction. The bigger firm will have more headcount and better back office operations, but the $200M fee pool allows far more generous cash compensation.
If one firm raises a $10B fund, they’ll have $200M a year to fund the operations of the firm (just from the singular fund, ignoring any prior raises). On the other hand, if another firm raises a $100M fund, they’ll only have $2M a year to fund their operations.
With that in mind, let’s take a look at what megafund (the biggest firms) associate salaries look like.
No surprise, private equity associates at the biggest firms are pulling down the biggest dollars. The best comped associates are pushing $400k+, more than the average for senior associates across all firms.
Not bad for your third year out of school.
The difference in comp by fund size doesn’t stop with associates either:
Principals who invest out of the largest funds, $10B+, earn cash compensation over 2x that of Principals who invest out of the smallest, <$500M funds
Senior Associates who invest out of the largest funds, $10B+, earn only 6% less in cash compensation than Principals who invest out of the smallest, <$500M funds— Odyssey Search Partners
The takeaway here is that, almost always, the bigger the fund size the better the cash comp. A private equity associate salary at the biggest firms can be more than double that of the smallest firms (~$200k vs. ~$400k).
The smaller firm may give you a better work-life balance, more experience, and easier pathway to promotion, but you just won’t be pulling the same dollars each year.
It’s important to note that private equity compensation comes in two different forms. The base private equity salary is actually a relatively small part of the overall compensation structure. The most impactful comp comes in the form of carried interest…
The concept of carried interest is unique to the buy-side. This is where the really big dollars come into play.
Carried Interest is the share of investment profits that employees and partners of PE firms receive. It’s the real reason why people get into private equity in the first place. No one has ever become a billionaire off of base salary alone, but plenty have (in a relative sense) from carried interest.
Generally, PE firms are entitled to ~20% of the profits they produce. This 20% is known as the Carry Pool and is allocated among members of the firm (usually not available to the junior team).
Each recipient of carry will get a percentage of the total pool, e.g. 1% of the 20% of total investment profits. Below is a quick example to help visualize how this actually works.
In this case, a $5B fund returns 2.0x, which is a decent outcome. That means total investment profits of $5B (you doubled your initial money).
A 20% performance fee on this $5B profit gives the private equity firm a carried interest pool of $1B to split among its partners and employees, usually at senior associate and above.
Assuming a 1% carry allocation, you could receive $10M in carry over the fund’s lifecycle.
While the cash comp is nice, carried interest is where the real dollars are at. This is what separates PE from investment banking and is how senior PE professionals generate the majority of their wealth.
Sounds great, but you need to remember that carry is never guaranteed. Your fund may not perform and there may not be a carry pool. A 1% allocation on a carry pool of $0 is $0.
You also won’t start to realize carry for five to seven years.
During this time you need to stay at the same firm and let your allocation vest. If you leave, you’re probably out of luck. This is where the term ‘golden handcuffs’ really comes into play.
The cool thing about carry is that you can stack allocations in each fund. Private equity firms generally raise new funds every three to five years, or after the prior fund has finished deployment (investing all available capital).
The 1% allocation we looked at above is for one fund. When the next fund is raised you might get another 1% (or more if you’ve been promoted). As long as your firm’s performance is strong and it’s able to raise new funds, you’ll continue to ramp your earnings.
Check out the table below for an illustrative example of how private equity career compensation might look. This assumes you spend your career at a single firm that continues to perform well and raises more (and bigger) funds. It also assumes you actually land the promotion each step of the way.
The illustration above is a best case scenario for a middle market private equity professional. The chances of this happening for you are incredibly small – there are so many things that have to go right to hit this outcome.
But, if they do, you’re set for life. Even if you stall out at principal and never make partner, you’ve still earned more than most people will ever see.
If you can stomach the intense recruiting process, long hours, abrasive personalities, and occasionally mind-numbing work, private equity can really hook it up. There are few other professions that offer a similar level of potential upside.
The stars need to align for you to progress through the ranks and realize any of your carry, but, if you do, you’ll have hit the lottery.
Even if you don’t make it to partner, or ever see a dollar of carry, it’s not a bad start to a career to pull $250 – $400k+ only a year or two out of school.
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