Private Equity Pay Gains Fastest For Junior Levels

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Junior professionals in private equity firms are narrowing the compensation gap with their senior peers. But the rush of PE firms going public adds a new element to the pay equation.

Total compensation for PE staffers ranked from analyst to principal soared 29.2 percent in the year ended April 2007, according to an annual survey by Dow Jones Private Equity Analyst and Holt Private Equity Consultants.

Median salary plus bonus for analysts, associates, senior associates and principals came in at $215,000. Carried interest, or a fund manager's slice of returns, added another $1,300. Meanwhile, PE chieftans - those with the title managing general partner - pulled a median of $1.01 million, up 9.3 percent from a year earlier.

Separate research by recruiting firm Glocap Search pegged private equity junior associates' compensation at $201,000 this September. That was up 11 percent from a year ago - the largest increase of any group in Glocap's list, according to The Wall Street Journal.

Besides gaining ground on higher-ranking colleagues in salary and bonus, PE's rank and file are also slowly but surely advancing in carried interest - the real fountain of PE wealth. While their share of carried-interest dollars remains minuscule at this point, the proportion of junior professionals who received any carried-interest distribution has swelled from 10 percent to 27 percent since 2002, the PE Analyst - Holt survey found.

The uptrend of lower-level pay is being driven by a combination of increased fund raising and fierce competition for talent. "As firms seek to put more money to work, they also recognize the need to match this with junior horsepower from a talent pool that is contested by investment banks, hedge funds and other asset managers," Brian Korb, head of private equity at Glocap Search, told the Journal.

In Europe, some PE houses are reportedly raising the percent of carry allocated to junior staff at the same time they expand their asset base, creating what the WSJ called a "double-whammy effect." In contrast, U.S.-based shops generally reduce each employee's share of carried interest as the firm raises larger funds.

Public Ownership Could Restrain Compensation

However, compensation practices could shift yet again as more private equity shops seek public shareholders. Despite headwinds created by the credit crunch, on Tuesday Och-Ziff Capital Management priced its initial public offering, and Kohlberg Kravis Roberts moved closer toward going public by filing an amended prospectus for its $1.25 billion IPO.

Some believe that going public will deprive PE and other alternative investment firms of much of the leeway they now enjoy when making compensation decisions. These experts note that publicly held companies often cut expenses when faced with short-term profit fluctuations. And public disclosure can be an inhibiting factor in itself. "(Shareholders) can be critical if compensation is really much different than a lot of other companies, especially if they haven't excelled," says George Yulis, principal at Rothstein Kass Executive Search Group, which places accounting and operations staff at hedge funds. "In a private company (owners) can do what they please" in terms of staff compensation.

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