WHAT's IN IT FOR ME?(2)

As part of Private Equity International's recent COOs and CFOs Forum in New York, private equity finance professionals in the audience were quizzed on their firm's compensation dynamics. The survey elicited informative responses, a selection of which can be found below.

With private equity firms raising ever larger funds and expanding their footprints into new geographies and lines of business, the need to expand the payroll has increased in tandem – both at senior and junior levels. In the preceding article by David Snow, it was acknowledged that one dilemma facing private equity firms is whether to add these new recruits to the carry pool while running the risk of upsetting current employees who are happy with the existing structure. Our survey found almost two-thirds of firms willing to accommodate newcomers into carry schemes.

Carried interest is one of the biggest weapons a private equity firm has in its armoury when it comes to both attracting and retaining the best talent. Therefore, it would appear to be a prudent course of action to provide as many employees as possible with access to the carry scheme. Our poll showed access to carry extending beyond partners and shareholders in the management team to include principals in 60 percent of cases. However, only in a fifth of cases were all team members, including admin staff, able to enjoy the fruits of carry.

Investors continue to pile capital into private equity on the back of the generally outstanding returns achieved in recent years. But are signs emerging that the good times might be under threat? When asked how good a year their firm's carry scheme enjoyed in 2006, a polarisation emerged: more than a quarter saw it as the best year ever; while almost half said it was not one of the best three years the firm has had carry-wise.

The increasing status attached to the finance function within private equity firms is indicated by the outcome in the first of these charts, which shows more than half of CFOs and COOs now earning at least $300,000 in compensation last year and more than a quarter earning in excess of $500,000. The second chart shows the annual compensation bill for finance and admin staff climbing over $1 million in almost a third of cases.

While compensation for CFOs and COOs is in the ascendant, less than a third of those canvassed said carry formed part of the package. Almost two-thirds said compensation came in the form of salary and bonuses only.

As the scale of private equity expands, so the importance of having a credible finance function has made its way up the agenda. Credible, but not necessarily sizeable: more than half of those surveyed said the finance team at their GP had only two to five members.

Respondents to the survey comprised representatives of buyout firms (26 percent); venture capital (22 percent); funds of funds (13 percent); diversified (10 percent); growth equity (6 percent); mezzanine/debt (1 percent); and other (22 percent).