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Private equity pay is less perky

Private equity is the promised land for many junior bankers. But pay is being spread more thinly as the number working in the industry rises.

The Australian market for private equity professionals remains small
but has shown “dramatic growth” in the last three to four years, says
Victoria Biggs, a consultant with Jon Michel Executive Search.

Biggs estimates that the entire venture capital/private equity
industry employs “400 to 500 people” in this country – which means
about 20 to 25 new hires a year, up from just three to four in 2003.

Base salaries in private equity are comparable to those in investment
banking, but the bonus side is “generally lighter”, says Biggs. “Where an
investment banker with five years’ experience might be on 1.5 times
your base as a bonus, in private equity that could be somewhere between
50% and 100%.”

The attraction that makes the difference is the lucrative carried
interest, or ‘carry’. This is the proportion of profits that a private
equity fund’s investment team receives after a certain internal rate of
return (IRR) has been reached and the investors are paid out, and it
can be worth several millions.

But as teams become larger, Biggs cautions that carry is being
“shared between more mouths”.

“There might be 15 professionals on a team, and clearly the carry can’t
go as far as it did when there were only three or four. As the
industry grows, the amount of carry that’s available to the people in
the team can decrease,” says Biggs.

Lynne Muirhead, a consultant at Johnson Executive Search, says that
candidates looking to move into private equity have to look carefully
at not only the size of a firm, but where it is in its investment

“If you were going into a large firm, there’s a chance that it will
have the opportunity to raise more funds on an ongoing basis, which
gives you more opportunity to get into a carry scheme and be attributed
points quicker.

“But if you’re going into a small firm that is in the advanced stage
of the investment cycle – say, three years into a fund with a five-year
payout – it could be a couple of years before you get any meaningful
carry attributed to you. Depending on the market, the bigger firms have
greater capacity to raise money and potentially have cycles starting
all the time, and candidates have to keep that in mind,” says Muirhead.

Comments (1)

  1. I think it is also important for aspiring entrants to the PE realm to realise, particularly at the Analyst/Associate level which is where most of the hiring goes on, that carry is only attainable generally after at least a couple of years within the firm, regardless of what stage in the investment cycle, the hire is made. Therefore a move into private equity for purely economic reasons at this level, would be ill-judged.

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