Private equity funds can no longer afford banks' best associates

It used to be the case that the best of banks' analyst and associate classes aspired to join private equity funds at the earliest opportunity. As we have noted on various occasions, this is changing.

With first year associates in investment banks' IBD businesses earning $200-290k this year, and second years earning $260-360k, recruiters say many private equity funds are unable to compete.

"It's the salaries that are the real issue," says one recruiter. "If you get a first year associate in an investment bank who's on 75k, a PE firm won't pay it."

Gail McManus, managing director of the aptly named 'Private Equity Recruitment,' says it's not so much that private equity funds can't afford to match the pay now on offer in banks, as the fact that they don't particularly want to.

"Candidates should move into private equity because they're interested in the private equity model, rather than for a short term pay hike," says McManus. "If you're purely interested in short term gain, you should stay in banking."

David Howell, managing director of EM Financial, says it still makes financial and careers sense for investment banking analysts to move into private equity: "For analysts, the first three years can be intense, with modelling a large element of the work. If they time it right, a good PE house could give them carried interest within two years of joining and they could never look back."

For associates, however, Howell says increased banking pay means the choice to move into private equity is more finely balanced.

McManus says the real issue isn't so much higher banking salaries as higher banking bonuses. "Base salaries at PE firms are fairly similar to banking - most first year associates will be on 65k," she says. "However, while some associates in banks have been getting 200% bonuses, at PE funds the bonus is more often 50-100%."