Speaking with a PM of a new pod for the past couple of months, they have been allocated a ~$500mm book; if I join, will be the first hire in that pod. What is a reasonable comp I could ask for?
For background, ~5YOE in finance (typical path of Target School + good IB group + Buyside). Is there much discretion in terms of comp?
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Interested. I am in a similar position. Spoke to PM a couple of weeks ago who asked how I would like my comp structured, base and bonus. How do I answer this? I want to get as much as possible, but don't want to go overboard. Can anyone assist? I am still quite junior, but she stated comp wouldn't be an issue. Should I ask for P&L % and guaranteed first year bonus? I know it is risky to move to a MM pod, so want to be rewarded.
How many YOEs? Base case is probably going with this year's upcoming comp as the reference point with upside for taking risk in a pod
2.5 YOE total (all buyside). Currently in large SM, so I do think it is somewhat of a more riskier option moving to a MM pod. It's not a move I will definitely make if the upside in terms of comp isn't there. That's why I am keen to hear what people think I should be targeting. The PM mentioned that resources won't be an issue for the suitable candidate. Given this additional information, do you think I should be targeting a % of P&L and/or guaranteed first year comp? Thanks.
$200k base + 5% PNL, would try starting there. If you feel like the PM is desperate and/or they REALLY want you or your background and experience is particularly valuable, you could try for $200k base + 6.5% PNL. They'll probably push back but would try to nail them down at least on buckets of what are "show up for work" "good" and "great" years, and what expected comp would be. % PNL typically goes up over time as you and your team generate value, along with total book size, so I'd view it as a way to get attractive economics with the potential for a lot of upside and a chance to get a carve-out or PM opportunity in the future.
Please note: Risk parameters here matter. If the fund is factor neutral, ROIC will be much lower, on average, than a beta neutral (but not factor neutral) fund or market neutral (but not beta neutral) fund, which is usually lower than discretionary risk. Of course, these funds with more restrictive risk parameters are typically levered a lot more than funds with more permissible risk parameters (think 10-15x...), so there's plenty of money to go around as long as the PM is able to consistently generate positive returns.
Another way to think about this, is if you are the first analyst in a new PM's book, you probably want to try to negotiate for 25% economics of whatever the incentive feed is that your PM is getting (which is usually in the ballpark of 20% of PNL generated). Many pod shops have passthrough economics which means each PM is basically their own business, and their fees to run their own book come out of that 20%, including you. Think of it as the 20% of the 2/20 of a SM.
Hope that helps.
Are you at a multimanager?
And if 5% of pnl is what should be negotiated at a new pod, what would you say is normal when negotiating for a pnl cut at an established pod that's been around for some time?
I'm at a fund that doesn't fit neatly in a SM/MM bucket. But I know many MM PMs, have been involved in the traditional MM PM hiring process, worked at a SM, know allocators, and so have had exposure to a bit of everything.
At the end of the day it's all about leverage. The riskier the position, the more you can ask. Likewise, the better the perception of the analyst (assuming you in the case), the more you can ask for. 5% PNL is the basic starting point for an analyst who is going to take some degree of "PNL risk". Just to be clear, this isn't a completely green analyst or associate. That's a fixed cost usually base + ~1-3x bonus, with 0 bonus unlikely but possible if your PM is a huge asshole. At the analyst level who takes PNL risk, the scale is roughly 5-10% of PNL, the lower end being the starting point and the 10% being a career analyst with a very good track record who may not be interested in being a PM. 10%-15% is the start to the "Junior PM" level, which can be a PM in training or whatever, and 15-20% is a more seasoned PM with an established track record.
The bigger the book, the less % PNL each analyst is likely getting, though total comp per analyst in many cases may be higher given the scaling that occurs at higher AUM levels. $2 bn books usually don't have 4x the analysts as a $500 mn book, but rather 2x the analysts. How that is split between analysts and PMs is just a game of chicken that occurs on an annual basis.
Lastly will caveat this by saying this is in therapeutics, which is seeing incredible amounts of comp inflation right now, so may be skewed.
The math above is the right way to think about it. One distinction though is that the 5-10% of PnL is referring to a split of *analyst-generated PnL*, not *team-level PnL*. For instance, if a team generates $100mm of PnL, comprised of 4 risk-taking analysts who each generated $25mm, they're each getting 5-10% of the $25mm they generated, not of the $100mm the team generated. So, breaking down the team carry of 15-20% on *total* PnL, 5-10% of that goes to analysts, and generally ~10% to the PM (using round figures here; exact splits vary by firm based on team-level expenses that need to come out of the gross PnL and tenure of PM).
So, using a very basic example with round numbers and assuming no team-level expenses deducted from PnL (usually this is several $mm), if a team puts up $100mm of PnL comprised of 4 risk-taking (usually mid-career / tenured) analysts putting up $25mm each, let's assume on avg each analyst gets 7% of $25mm = $1.8mm and the PM gets 10% of $100mm total = $10mm. Again, 7% is on the high end for people who are not career analysts.
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Can you touch a bit more upon the comp inflation in therapeutics? What's driving that (despite the down year in the subsector)?
Good question. I think one way to think about comp is that it's some function of sector AUM, number of companies in the sector (and how idiosyncratic they are), number of funds divided by qualified investment professionals. As you noted, biotech performance in the public markets last year was horrific and most therapeutics funds were down somewhere between 10% and 40%. However, money from LPs, in general, backfilled any lost capital and/or redemptions as they still have a long-term bullish outlook on the sector, particularly for funds with private investing arms (basically all specialist HC funds invest in privates at this point to some extent). Private "gains" (which in biotech, in my opinion, always includes a heavy mix of financial engineering) helped offset public arm losses, but we'll see how long that music can last without incremental buyers of paper on the public side.
So, the capital is there still to support the funds for the most part. In addition, there's now over 800 publicly traded biotech companies. The number of publicly traded biotech companies increased 60% between 2020 and mid-2021. Each of these companies are highly idiosyncratic, with different platforms, mechanisms of their drugs, drug properties, indications, market expectations into data etc. Furthermore, given the strong performance of the XBI before 2020 (and in-particular during 2020), many new funds were started by #2's/DoRs/sector heads of these successful mature biotech funds toward the end of 2020, which increased demand for analysts given any therapeutics fund really needs 2-3 analysts minimum regardless of AUM. Considering the very long time horizon to fully train a therapeutics analyst (4-7 years MD and/or PhD, 1-3 years sell-side), there isn't a tap you can readily turn on and meet the demand to cover the sector. Buy-side had been drawing more aggressively from sell-side juniors throughout 2020, banks themselves wanted to retain juniors to rapidly convert them into 3rd, 4th and 5th string covering analysts given the rapid increase in capacity needed from biotech IPOs, and that stream had run completely dry by the time 2021 rolled around.
Basically, biotech analysts are relatively inelastic goods that saw a rapid increase in demand in 2020 and early 2021 and which remained sustained throughout 2021 to present. I'll also say that, given the lack of returns this year and high-water marks, I would anticipate funds looking to continue to operate will turn to shelling out equity to keep high performing analysts on-board.
This is WSO so I'm assuming everyone is reading this and wondering what is comp. If you have an advanced degree and 1-2 years of buyside experience, we're seeing ~$400k guarantees being thrown down as the standard rate for the most junior buy-side analysts, which is up from $300k just 12 months ago (and before biotech started its massive underperforming trend). Pulling over an experienced and well-performing buy-side analyst/senior analyst is going to probably cost you at least $1-2 mn up-front guarantee, with PNL upside for that year, and/or possibly carry attached as well (in range of 3-10%, depending on perceived value/experience/fund size and leverage/etc) for SMs. MMs, most notably citadel, was tossing out multi-million up-fronts and carve-outs for mid-level analysts, though not sure what's going on over there right now given Surveyor had large blowouts and Citadel proper had therapeutics underperformance except for pods that could offset losses via another sector such as HCIT, tools or medtech.
As an analyst (especially a junior one) you are a commodity and replaceable. Few PMs are going to allow your upside to scale into PM comp territory. The MMs tend to have standard base salaries for analysts (around USD 150k) and the real money comes from the bonus. On this point, I would ask for a % of the pod payout with a hard cap that the PM thinks is fair. I would think a USD 1m bonus would be a realistic hard cap given your experience. So let's say on 500m, leveraged up 5x and the book does 3% (75m P&L) and the pod gets 20% of that (15m). You are not going to get 15-20% of that, just no way a PM will let you collect that much of the economics. The comp for analysts is based on replacement cost more so than P&L linkage and there is no shortage of guys who would kill to make USD 1m and can do the job just as well as you can.
I am pretty sure the PM gets 3% of the un-levered AUM, as it isn't levered at the pod level, but rather at the firm level. Therefore given the above scenario the pod would be getting $3m. If this is the case, is it still not realistic to ask for 15-20%?
The comp pool is based on the unlevered PNL, not levered. That's why MM's are such a good business model provided you have very good risk controls on the firm level.
OP - can you share what your comp currently is all in at 2.5 years into job? Lot of us in similar seat would like to understand tradeoffs to going to MM as well i.e. how much more do you need to get paid to jump over.
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