It's been an extraordinarily good year for M&A bankers. Worldwide M&A activity is up 39% on 2014 and is approaching an all-time record, according to Thomson Reuters. At Goldman Sachs alone, M&A fees were up 45% in the first nine months of the year versus the same period of 2014. Young M&A bankers are reaping some pretty healthy rewards. Everyone's happy, if overworked.
Just when you thought that M&A jobs were the pinnacle of finance careers in 2015, however, Blackstone has released some figures that may give you pause for thought.
The 'leading investment' and private equity firm put out its third quarter results yesterday. Ok, there were some 'issues'. Year-to-date, Blackstone's 'economic net income' (its core profitability measure) is down 41% on last year and in the third quarter, Blackstone actually made a loss. But if you believe the spiel from CEO Steve Schwarzman and CFO Michael Chae in yesterday's conference call, the decline in profit was a transitory issue caused by volatile markets. Longer term, Schwarzman said Blackstone is fine and that volatility is even a good thing: Blackstone has $17bn in 'dry powder' waiting to be invested and as financing becomes less available to other market participants, it will be able to invest at lower prices.
Most notable, however, was the pay.
Year to date, Goldman Sachs has accrued $288k in pay for each of its 36,900 staff. Blackstone doesn't provide staff numbers on a quarterly basis, but at the end of 2014 it employed 2,190 people and so far this year it's accumulated $1.4bn with which to pay them. That amounts to....$656k per head.
So, the average employee at Blackstone earns 2.3 times more than the average employee at Goldman Sachs.
Naturally, there's no guarantee that you'll be earning $650k the moment you start at Blackstone. The bulk of the money is likely to go to the firm's 137 senior managing directors - just as the bulk of Goldman's pay pool is likely to go to the firm's partners.
Equally, as at Goldman Sachs, pay at Blackstone is falling. Last year the average Blackstone employee earned around $984k; this year, pay is 30% lower. The reduction is mostly due to 'unrealized carried interest', which turned negative this year as the value of Blackstone's 'unexited' investments has soured.
Carried interest is typically paid out to Blackstone's senior staff at a rate of 10% to 20% when a fund exits all its investments, subject to certain 'hurdle rates' being met. If those hurdles aren't achieved at the end of the fund's lifetime (which could be up to 20 years), Blackstone says it has a clawback mechanism in place to recover any carried interest paid out ahead of time.
Needless to say, clawback clauses are common in banking too. Wherever you work in finance now, you risk having some of your pay reclaimed. But in a private equity fund like Blackstone, it is at least reclaimed from a higher base.