Private equity firms in the UK have increased pay for junior employees by around 20% over the past 12 months in an attempt to put some clear water between their compensation and that of investment banks.
Associates in large and ‘mega’ private equity firms now earn a minimum base salary of £75k ($98k), and up to £100k ($130k), according to research from private equity recruiters Kea Consultants. This is a £10k increase on last year. Bonuses come in at £56-102k in the largest private equity firms, with an average of £71-84k, it suggests.
This means that an associate in private equity in the UK now earns a minimum of £150k in total cash compensation, but potentially up to £200k. A similar role in an investment bank pays an average of £145k for associates.
“Private equity firms are usually slow to roll out significant pay rises,” says Edmund Thomson Jones, a director at Kea Consultants. “What you saw last year was some of the larger firms increase pay to catch up with salary increases in investment banking. This year, everyone has increased salaries and PE firms also want to stay ahead of the banks.”
In theory, private equity firms have no problem attracting talent. Despite attempts to retain junior staff, shake-up working practices and accelerate promotions, the route from banking to the buy-side remains ever-popular.
“There are two things happening – every private equity firm wants the top 20%, so they are competing for the same talent pool,” says Thomson Jones. “Then, private equity firms are becoming more diverse in who they take on – IBD, yes, but also research on the sell-side and buy-side, consulting or even entrepreneurial backgrounds.”
But if pay is increasing at the junior end, private equity firms have been reluctant to increase compensation at the senior end, suggests the research.
“Pay increased last year and has become a lot more standardised throughout 2016,” says Thomson Jones. “Some middle market firms have increased salaries to ensure less seasonal fluctuation, but for the most part compensation has remained static in the senior ranks.”
More problematically for a lot of large private equity firms, carried interest payments are on the wane. This has traditionally been where the big money is earned in private equity, and where the more senior staff receive the lion's share of their compensation. Carried interest is a proportion of profits from funds paid to staff when a private equity firm exits an investment. Usually it's triggered when the investments reach a particular hurdle rate (a return of 7-8% on its investments), but a lot of the 'unrealised' carried interest in large PE firms is in negative territory. This is bad news for overall pay packets.
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