Sharing the pain

A new survey of private equity professionals showed across-the-board decreases in compensation – mainly in the form of bonus cuts – for the first time in a decade, with private equity fund funds taking the biggest hit.

Compensation for private equity professionals has fallen across the board, according to a new study. All categories of investment firm have been hit – including buyout, early-stage venture capital and private equity fund of funds – for the first time in more than 10 years.

The report, by executive search firm Glocap Search and Thomson Reuters, analysed base salary and bonus compensation for thousands of private equity professionals. Unlike last year’s survey, which showed salaries and bonuses either rising or showing no decline, the 2009 survey clearly shows the impact of the financial crisis on the industry.

“Last year the picture was clouded as far as the implications for private equity compensation, but this year some of those implications have played themselves out,” said Glocap senior partner Brian Korb. “There were increases last year and this year it has kicked itself into reverse, not surprisingly.”

In the decade that Glocap and Thomson Reuters have been conducting this survey, Korb said he has seen the compensation of certain management levels, fund sizes or asset classes fluctuate. But never before has every part of the industry been uniformly hit, as was the case this year. 

“For instance in the post-dotcom bubble, venture capital had its pullback but buyouts were fine, but this is the first time where everyone feels worse,” he said. “No one was immune to it this time.”

Among the survey’s other findings were that traditional later stage private equity/buyout funds still paid the highest compensation levels – with compensation increasing significantly as assets under management rose. Venture capital firms ranked second. Average compensation for senior associates at buyout/growth equity funds held relatively steady with only 3 percent decreases. But compensation for vice presidents at such funds was down 5 percent to an average of $424,000, with bonuses down as much as 10 percent in some categories.

Fund of funds compensation across all levels was down 1 to 3 percent, the lowest drop among the asset classes. Overall base salaries across most categories were relatively unchanged from last year’s levels, with most declines in total compensation were reflected in reduced bonuses.

“Ultimately the firms were saying they wanted to preserve their cultures,” Korb said. “There was no real sign they were going to cut bases or anything dramatic like that. In the good times bonuses were very predictable for the most part, and this year as the tide went out and things got exposed a bit more, funds looked at who held their ground and who was falling behind. Some firms either said ‘we’ll cut bonuses across the firm, we are all in this together’, or others said ‘some are doing a great job and others we want to see more from, so let’s add variability to the bonuses’, and that’s what led to the drop.”

If there is a silver lining, Korb said, it is that such decreases are less painful when placed in the context of the industry’s remarkable growth in 2006 and 2007. 

“Compensation had really accelerated over the last several years, and this takes us to a time not so long ago,” he said. “When you speak to funds, their philosophy is they had some pretty good years, and it wasn’t going to last forever, so they are sort of pulling back and normalising. Whether it is over is the question out there.”