Is Sky High PE Comp Here To Stay?
Given that inflows to PE are decelerating, and returns are compressing as the space becomes more competitive, can current compensation remain at the highs it is at now? While people in PE clearly pay for this in terms of hours and lifestyle, it seems to me that at least based on last years Heidrick report, PE Comp is still sky-high. On a risk adjusted basis even MM PE seems to pay better than top HF's (at least at higher levels). Given this do you all believe compensation will remain at current levels? If so,why?
Bump
What sky high comp are you talking about? Most shops have had minimal revision to junior comp and our purchasing power is falling off a cliff. Sky high pe comp was 10 years ago+
Nobody goes into PE to be an associate, sure junior level comp isn't crazy, but 4 million in DAW for a VP and 8-12 million for a principal plus god know for a partner is pretty remarkable compensation given the experience of those people, the favorable tax treatment, and the much lower risk of a blowup or getting pushed out (unwillingly because your bad, not because of attrition due to hours).
DAWS?
DAW is the answer unto itself. Given the high mobility of investment professionals these days, generic VP X is unlikely to get anywhere close to the end of a 5- or 6-year vest. Additionally, many of my friends from MBA have not gotten carry in previous funds, and so have an even longer road to liquidity. This is separate from the financing of the GP commit required to earn carry (I'm not at a fund with a traditional carry structure, so I don't fully appreciate how this works-- hopefully a much smarter user can correct me).
TL;DR: It's easy to give away notional $ behind an 8% pref, even with a GP catch-up.
Cash comp probably isn’t coming down, most of what I hear is going the other way. But no one gets rich on base + bonus. Carry will directly vary with returns in the space.
It’s entirely possible we see an era of lower returns in current vintages (although I wouldn’t consider it a foregone conclusion), but if true it will probably correlate with diminished returns in other asset classes too. We’ve gone through plenty of tough times before. You should see the returns on our 2007 vintage fund vs our 2004, our 2013, or our 2017…
If you’re managing assets well, it’s a blip in the next 20 years. If anything, PE should be much more stable than things like banking, VC, or public markets. Could be a good era for private debt though…
Eating the lunch of balance sheet banks, doing deeper leverage deals, etc.
Inflows to PE decelerating? According to who, quite the opposite actually.
Returns compressing? Where? Returns across the last few vintages are very very strong
citation needed
There are many firms struggling to fund raise right now but it’s under the radar. There’s going to be a phase of “consolidation” in the industry.
Megafund asset aggregators and specialized niche industry specialists will survive. Generalist MM / UMM funds will struggle more.
Lastly, even within the mega funds, the pockets of capital that are actually growing are credit, real estate, infra, other types - classic PE funds are not growing all that much. Even the largest funds are hitting a ceiling at $25-30bn - unlikely to materially cross that number for the foreseeable future (at that size you basically are just doing take privates and it’s almost impossible to hit a 20-25% IRR)
IMO - PE has distinctly entered the “cash cow” phase of the BCG matrix. As a rule of thumb - money is made when industries are in growth mode and we arguably are not in that phase anymore
Do you believe then that current compensation (as of last years Heidrick report) is representative of this new phase for pe of high market share and low growth, or do you believe compensation and opportunities for advancement will compress?
In the short term cash comp and carry* (on paper) may very well grow. The reason is that PE funds had a growth spurt the last few years since 2015. There were not enough mid-level deal professionals in the pipeline - now everyone needs to hire to deploy the capital they raised. It’s like the classic bullwhip effect in supply chains - some demand supply imbalances at the end of the value chain creates massive disruptions upstream - in this analogy, higher comp. Eventually it will normalize / go the other way potentially.
However, as the industry progresses, medium / longer trajectory in terms of headcount may be flat to down as those generalist firms shake out (there will be layoffs, wind downs etc).
Lastly, on carry - remember carry DAW is literally a number on a piece of paper. I have a below 50/50 confidence level that most of that carry will be realized at 2x especially if we enter a new normal where interest rates are not 0%….
I think we’ll see a lot of struggle in that MM/UMM especially in tech focused space.
Tons of funds have posted incredible returns riding the tech wave over the past ten years and massively grown fund sizes - especially in recent years we’ve seen them get more and more aggressive to deploy these massive funds, and I feel like a lot of current vintages will fall way behind historic returns. Interesting to see how all of this will play out. My personal thesis is a lot of the less-tech heavy more historic value based places that have lagged a bit will see a resurgence but we shall see
Agreed, eCommerce especially is getting crushed lately, like 30-40% declines in multiples in some cases, its wild. Starting to see some layoffs at some of the farily scaled but still unprofitable firms. Tech PE funds exiting ecommerce sector investments may have a difficult time. I'll be following to see whatever Thoma Bravo does who seem to be trying to buy every $2bn-$10bn public SaaS company in existance (bottomline tech in december 2021 for $2.6bn, Anaplan - March 2022 for $10.2bn, rumored to be in bidding for Temenos now for $7bn+). A bunch of savages.
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