In the past decade, a new option has appeared for anyone who wants to quit banking and move to the buy-side: direct lending funds, of the kind that issue credit directly to companies that want to avoid borrowing from banks. Some direct lending funds are hedge funds, some are former private equity-focused funds. Newly-released figures from the European credit fund run by KKR, the huge U.S. fund which invests across asset classes, suggests the pay in direct lending isn't as good as you might expect.
The figures are derived from the report for KKR Credit Advisors EMEA LLP for the year ending December 2018. KKR Credit Advisors EMEA conducts the credit investments of KKR in Europe and didn't seem to have a great year. It achieved a turnover of £19m ($23m) in 2018, down from £28m one year previously. Operating profit fell from £21m to £12m.
Declining profitability had an impact on the pay of the 16 staff and 17 partners working for KKR Credit Advisors in Europe. In 2018, average pay per head for each staff member was £170k, down from £234k the year before. Average remuneration for each of the 17 partners fell from £1.4m to £678k ($838k) over the same period. In both cases, the reduction came in the compensation paid to staff as stock bonuses and carried interest.
KKR's figures suggest moving to a buy-side fund is not as lucrative as you might think. While partners at KKR Credit Advisors scraped by on less than $1m last year, most senior bankers can easily expect $1m+. Similarly, juniors in investment banks typically earn £170k as fourth year associates. There's less pay upside than you might think.
To make matters worse, carried interest typically only pays-out after a fund exits its investments and this usually takes four to five years (maybe more), and stock bonuses at KKR are deferred over a five year period.
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