Average LMM/MM PE Partner income vs IB?
Is PE worth it if returns are going down relative to historics? PEs aren't buying businesses at 5x anymore, driving down returns. Being able to lever up is also getting trickier. Value creation is getting even more important to the point where returns are just not going to be as high anymore.
Regardless, it's still going to be well to do industry but makes you wonder, what exactly is the average income of Partners at around 600m-1b AUM firms? Are you better off sticking with IB and likely making 1m+/year or PE where it's largely driven by carry?
bump
PE will always win if you have decent enough returns and can find a seat for 15 years. Look at Hendricks report - issue with PE is that finding a 15 year seat is crazy hard and people trade jerseys all the time
So, unlike IB, changing funds really hurts you because you lose your entitled carry if you leave, thus making past work irrelevant for your economics? Am I understanding you correctly? What are the signs of long-term seats?
IB cash comp ~ equals cash comp at UMM PE funds for similar tenure
PE you get outsized $s because of coinvest and have carry
In LMM PE your cash comp is probably 30-40% haircut to IB
Cash comp is probably $1-1.5. Carry is probably 4-7 pts in a fund (for a non-founder), so probably $10-25M DAW, spread across that fund vintage’s life cycle.
PE almost always pays more in pure $ value over a longer-time frame b/c of carry assuming you can deliver the returns promised. Becoming a PE partner is also much harder than IB MD, as there aren't that many partner seats at MM/UMM/MF spots compared to MD seats in the MM/BB/EB world. This is simply due to PE partners not wanting to give our further carry than they need to, PE is much more of a zero-sum game than MD because after all the carry pool won't change that much from one new partner added but it can lower the comp of the other partners while the bonus pool might increase with a new senior banker that brings in fees (irrespective of guaranteed comp which only lasts a year or two anyways). Also important to note the smaller the firm, the smaller the number of partners as well. LMM PE founders make multiples on UMM/PE partners depending on returns as well, and senior partners in LMM/MM funds can also clear the average UM//MF partner comp as well. It all just depends on the number of carry dollars for a fund and the size of teams (also account for public or not if large UMM/MF firm, but not a worry for the LMM/MM space).
IMO, IB beats easily if the goal is to make up a nice nest egg to either retire early or go do something you enjoy me given the longer-run nature of PE payments as most PE payments for anyone VP or up are through carry. IB is also significantly less risky as at the senior levels you are a salesperson and the ultimate outcomes of the deals have little effect vs PE where your eventual comp through carry is determined through the deals and internally as a partner you stake your reputation on every deal you lead.
The other part of this equation is that if you're fired as a senior IB professional (say Director or MD) you don't actually lose that much - there is some deferred comp you forfeit but by and large your comp is year-by-year, so you can immediately hop to a competitor or start your own firm and reset your compensation.
PE on the other hand - you lose a ton of unvested carry that will be hard to recoup as your vesting period will reset and employers won't give you your full forfeited portion in carry.
Do you lose carry if fired? As opposed to quitting for competitor
Carry vests over the years, so yes. IBD as a senior is much safer as a career and if your risk-adverse. It's all risk-reward.
Completely depends on the structure of your carry vesting and general partner agreement. Some PE firms have very punitive clauses where employees who compete forfeit all of their vested carry. In some cases it is tiered where you might lose 10% of your vested carry if you compete, 10% if you quit for no reason, etc.
From my experience working with a number of terminated employees, if an individual is terminated but still liked by their PE firm, often times the firm won’t cut back their vested carry even if they go to a competitor. Not everything goes exactly according to the general partner agreement …
At the more senior levels, carry vesting upon departure is often negotiated as part of the separation. A departing senior employee has the ability to make life very difficult for their former firm so the departing employee can sometimes get additional vesting in exchange for non-disparagement agreements and similar terms.
Just to be clear an average md is as senior as a pe principal not a pe partner. Pe partner is more like a senior md.
so yes cash comp is higher in banking
Given the natural career evolution of 2+2 from IB to PE, I think people coming up in this industry put too much stock into comparing the two. It makes a lot of sense to compare at the associate level, where day-to-day experience, exit opportunities, compensation are similar / comparable but marginally different. However, as you get more senior in each field they become fundamentally different jobs. There is not that much in common in the philosophy and day-to-day experience of a bulge bracket IB coverage MD, a leverage finance MD, a UMM PE partner, and a LMM PE partner. Similarly, the skillsets needed to succeed in each of these roles is not the same. So whenever I see these questions, my answer is usually: you will make the most money in the path that best suits your personality and strengths. If you take the time to think through the skillset of a successful senior professional in each of these roles and line it up to your personality, your strengths, and your interests / goals, you meaningfully increase the odds you will maximize your earnings potential by both (1) selecting the path you have the best opportunity to be 90th percentile at, and (2) reducing the risk that you burn out. The 90th percentile LMM PE partner is out-earning the 50th percentile UMM PE partner and the 50th percentile IB MD. Conversely, the 90th percentile BB MD is out-earning the 50th percentile LMM PE partner. I think it is critical to understand yourself, understand there are different skillsets needed to succeed in each of these roles, and make an individual decision not a generic one.
With that said, I do think the private equity industry is evolving and becoming more competitive. I am firmly of the view that middle-market generalist funds reacting to brokered deals and bidding broad auctions are not sustainable. These may be a good way to make a living in the short- or medium-term, but it doesn't build the right depth of expertise for mid-level professionals, and does not have the sustained return potential for senior professionals. In my view, that leaves (1) scaling up AUM to aggregate more capital to fund more management fees and increase dollars managed per investment professional, or (2) specialize and limit breadth of focus / size to try to maximize return potential. I think either of these paths can prove very lucrative in different ways, but come with very different day-to-day experiences, career experiences, and "entrepreneurial risk" levels.
I personally was much more intrigued to join a specialist fund, because I find it more intellectually stimulating to be specialized and focused. I've really enjoyed living and breathing a specific sector. In doing so, we've had several consecutive funds in the 2.5-3.5x MOIC range and everyone has done very well for themselves through that period (you can imagine how for a senior partner, with 15% of the carry pool on a fund that generates a 3x, it pays out really well). Those same senior partners probably do not make the same "cash comp" that a bulge bracket MD is making, but I would bet that they have out-earned counterparts in that time, though that probably would not have been the case if those had been 1.5x funds. I'm not suggesting you can base expected earnings on a 3x MOIC, but I do think there is a hell of a lot higher likelihood on a 3x fund when it is small, focused, you know the strength of the other investors, and you have direct influence over a material portion of fund performance.
Ultimately, a long-winded way of saying there is no point in asking "who will make the most, the best IB MD or the best MF partner or the best LMM partner", nor is there any point in asking "who will make the most, the average IB MD or the average MF partner or the average LMM partner" because neither of those questions likely apply specifically to you.
Great answer here and agreed on matching the skillsets here. In your view, what patterns, preferences, and skills make the difference in a LMM PE vs IB senior level? I don't have an interest in a megafund so considering either LMM or MM PE or growth. But comparing the skillsets / fit for each really does drive that equation. You have any input?
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