EB VP Comp vs PE VP Comp
Does EB VP Comp Beat PE VP Comp on Average? Why are people electing to go to PE if EB's comp so well?
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VP Carry makes the MM/UMM PE VP total comp much higher than the EB VP. Probably $500k+ If not more difference per year when including unrealized carried interested. The difference will become much much larger in PE Principal vs EB Director.
That being said, making VP/Principal in PE is 1000x harder than making EB VP/Director. Contrary to what people think, making VP in banking is pretty straight forward and easy especially if you started as an analyst. The reason you don’t see a VPs at BB/EB that started as an analyst isn’t because it’s hard at all. It’s because ~70% of them decide to go to the buyside, ~10% into corp dev, start ups, etc, ~15% move onto become associates but get burnt out and leave. Out of the ~70% of analysts who decide to pursue the buyside, less than 15% of them will ever make principal in PE (probably less than that)
PE comp varies widely by fund as there is no transparency on GP economics the way that wall st bonuses are almost public knowledge, so economics can be divided a number of different ways.
I think a new VP at a LMM fund with the latest fund of ~$750-$1B is around $350-$400K cash comp and +/-1% of carry with the cash comp doubling over 4-5 years. I wouldn't be a PE VP for the cash comp. The key is the carry if you can make it to Principal or Partner. It would be very common for a new Partner to have a point in "Fund I", several points from "Fund II" they received as a Principal and several more points from "Fund III" in which they became a partner.
To put some numbers to it, let's say series of funds were $750M, $1B, $1.5B, which would not be uncommon at a growing fund over the past 5 years. You might have 1%, 2%, 4%, respectively. Assuming a 2x MOIC, you're talking about $17.5M of carry at work ($1.5M, $4M, $12M) by the time you are a new partner. And then you still have 15 more years ahead of you (if you want it) to benefit from carry on new funds.
It's an interesting question - I'd say you are right if you are looking purely at the risk-adjusted nature of compensation holding all else equal. You should keep in mind that IB is a very pro-cyclical industry where bonuses can vary greatly year to year and IB firms will move quickly to downsize headcount in lean years which exposes you to some tail risk of your comp going to zero. And the result of IB layoffs tends to be that you move down tier in your next IB position or you move out to a corporate role which generally means lower comp in either outcome.
PE on the other hand is incredibly consistent as GP revenues are contractually committed for 10 years assuming there isn't some key man or fraud issue (which really only applies to LMM firms). And in lean years, you still have plenty of portfolio company activities to keep you busy and layoffs are rare (almost unheard of at the MD level other than as the result of a partner just doing bad deals).
No rule of thumb. Also, DAW also refers to the amount one would receive assuming a 2x MOIC assuming full vesting. Obviously, devil is in the details on vesting since it varies widely. Some firms are 7-10yrs on the fund, while others require you to actually be there for a liquidity event for some % of the vesting.
Every fund is different and timing of carry payments depends on the carry waterfall negotiated with LPs and whether there is a preferred return. To keep it simple, assume the fund invests 20%/yr for 5 years and realizations don't begin until year 4-5. For a fund to be in the carry, a GP needs to return an amount in excess of invested capital and mgmt fees/expenses called. In all likelihood, the first liquidity event will cover the mgmt fees and expenses and perhaps there will be some amount left for carry. Now, recall that this is the first liquidity event and everything else is still unrealized, so most reasonable GPs would probably hold back carry until the rest of the portfolio is more developed given that future losses could offset the gain from the initial portfolio company exit.
You should sign up expecting not to receive carry on a fund until year 6 or so. Having said that, once you are a few years in, you'll start stacking carry and will worked through the "j-curve" of entering PE. Once you've been at a firm for 5-6 years, you'll start receiving carry distributions on your first fund and will likely be a year or two into your second fund. After 10 years, you'll receive carry on the end of your first fund, the middle of your second fund, and now have carry in a third fund. It's a LONG road, but once you get there, the rewards are very hard to replicate outside of PE/HFs.