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Private equity bonuses rise on hedge fund threat

A new salary survey suggests mid-ranking private equity professionals saw big increases in their bonuses last year. Recruiters say the need to counteract the allure of hedge funds was partly responsible.

According to a survey of 196 private equity professionals by EM Finance, a financial services recruitment firm, analysts working in private equity in the UK earned between 48,000 (€70,000) and 55,000 in base pay during 2004, plus a bonus of between 15,000 and 20,000.

Associates, or managers, in private equity firms earned salaries of between 58,000 and 85,000, plus a bonus of between 30,000 and 65,000. Directors' salaries ranged from 80,000 to 160,000, while bonuses were from 40,000 to 160,000.

As well as salaries and bonuses, associates and directors also earned carried interest on the fund's investments, plus returns from co-investing alongside the fund itself.

Andrew Morland, a director at EM Finance, says private equity employees in continental Europe typically earn 10% to 15% less than counterparts in the UK.

He says middle management at private equity firms saw the biggest rise in remuneration last year. Some firms paid middle managers bonuses that were 30% higher than 2003. By comparison, directors' remuneration remained relatively static, with few receiving bonuses more than 15% higher than last year.

Rival recruiters say EM's figures sound roughly correct, but may be too high for employees of smaller private equity firms situated outside London. 'I would be surprised if directors are earning salaries of 160,000,' says one. 'My instinct is 130,000 to 140,000 tops.'

However, rivals agree with Morland that pay is being influenced by the allure of hedge funds. Simon Hegarty, a consultant at Walker Hamill, says hedge funds are increasingly competing with private equity funds and investment banks for analyst talent. Julian Bell, a director at Sheffield Haworth, says private equity specialists are increasingly enquiring about moving to the hedge fund sector, where returns are likely to be realised more quickly.

The interest is mutual, says Bell: 'Hedge funds are interested in making direct investments in non-listed companies, and to do that they need people experienced in investing in the non-listed sector. Private equity funds are the obvious place to find them.'

There have already been some high-profile moves in the sector. This year, for example, Och-Ziffm, a US hedge fund, hired David Stonehill, a private equity principal at Blackstone, and Anthony Fobel, a director of CVC Capital.

<US partners pay themselves less

Brian Korb, senior partner at Glocap, a New York City-based search firm, says partners at US private equity funds are paying themselves less in the way of carried interest than they used to.

These days, says Korb, partners take 70% to 75% of the carried interest in the fund. Five years ago, he says they were taking 80% to 85%.

Carried interest is the name given to the profits made by a private equity fund. For senior staff, it's the main form of pay. Over a six-year period, a $500m fund can easily make 'carry' of $100m. In days gone by, this would have been divided between a handful of very wealthy partners. But Korb says mid-ranking private equity professionals are taking an increasing share.

Why? Private equity funds are no longer the hottest place to work. If you want to make big money nowadays, you're better off at a hedge fund. According to Korb, an MBA making $400,000 per annum in private equity could make $1.3 million at the right hedge fund. More to the point, private equity funds only pay out every six years on average; hedge funds pay annually.

Obviously there are disadvantages. Not all hedge funds make money and some go belly-up. Korb says some junior and mid-ranking staff will always prefer the relatively stable private equity industry for this reason. But others can be tempted by the prospect of carry. Hence private equity partners are having to dig deeper than before.

'Private equity clients have been asking me what they can do about hedge funds,' says Korb. 'It doesn't make sense for them to throw cash at people, but what they can do is increase carry so that people buy into the long term vision.' The upshot is that partners are likely to keep less and less themselves: 'Partners will need to give away more and more carry in the next few years.'

There have already been some high-profile moves in the sector. Last month, for example, Och-Ziff, a US hedge fund hired both David Stonehill, a private equity principal at Blackstone, and Anthony Fobel, a director of CVC Capital.

Not all search consultants are convinced this is the start of a trend, however. Jonathan Goldstein, a principal and founder of Sextant Search, says the private equity industry benefits from a strong supply of junior employees: 'There are a lot of people who would give their eye teeth to work in the industry,&quot; he says. 'For every one person who leaves, there are hundreds waiting to get in. Private equity funds have no need to increase pay to compete with hedge funds.'

If you're working for a mid-sized private equity fund with between $500m and $1 billion under management, Korb says pay is likely to fall within the following parameters:

  • Recent MBA graduate: $225,000 divided equally between salary and bonus (no carry)
  • Principal (five to nine years' post MBA experience). Salary of $200,000 to $225,000, plus a cash bonus of 100% to 150%, plus carry of $3m to $3.5 million at the end of a six year period
  • Partner (nine years' plus post MBA). Combined salary and bonus of $500,000 plus, plus carry of $15 million at the end of a six year period
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