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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As I tell the MDs - no one got rich being a VP
Alright but which poor man makes more? An EB VP or a MF/UMM PE VP?
I'd imagine that EB base and bonus is higher than PE base and bonus. The heidrick report confirms this. But PE carry blows EB comp out of the water.
The PE version of 'profit sharing' is in the form of carry as opposed to a per-deal bonus but the major difference is that carry is taxed at long-term capital gains while a typical bonus is taxed as ordinary income, as such, I'd imagine PE vp comp to be higher
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)
What makes making VP/Principal in PE so difficult?
Someone more qualified than myself can give a more detailed reason, but I’ve been told it’s because PE partners are not willing to give up their proportion of carried interest easily, and principals require carried interest as part of their compensation package. There’s basically not enough seats opened/created at those levels. Look up any PE firm and go look at the Team pages. There are way more junior investment professionals than principals (3:1 - 5:1 ratio), so those that don’t get promoted get pushed out and need to find another fund. Unfortunately if you get pushed out, it means a ton of other senior associates / vps have also been pushed out across the PE world and are actively looking just like you. Not enough seats available for the huge supply of junior-mid level professionals looking for jobs. Compare this to banking, where every year you have plenty of places to lateral to if you are an associate/vp without much problem
where do other 85% of analysts end up? After their 2 years of PE (and/or MBA) what's their next step
Most common is to go down a market to LMM/MM funds but again, it’s hard to progress further at smaller funds too due to there not being enough seats available. A lot of people I know actually end up at hedge funds too. Many folks end up working in a senior position for a portfolio company, which can actually be quiet lucrative with better work/life balance. A lot of people end up at startups, corp dev, etc. Working at a UMM/MF PE makes you a hot candidate that almost every industry would kill to have, even if you couldn’t progress past the senior associate stage.
How about LMM PE VP total comp (including carry) vs. EB VP total comp?
EB VP cash comp is way better. LMM PE VPs make like $300-400k in base + bonus vs. $500k+ at EBs. Carry is way more variable obviously but assuming 1.5% of the carry pool at a $500MM fund (2x gross MOIC), it works out to an extra $1.5MM over 5-10 years.
The devil is in the details here obviously as each of those variable can shift significantly. VP-level carry could be anywhere from 0.5% to 2.5%, actual performance can vary a ton, you can have carry in multiple funds at once, exit events can be random, etc. Plus, most firms also offer co-invest (with leverage) and in some cases it's a bad look if you don't contribute heavily (meaning substantial portions of your first couple of carry checks). This eats up your cash flow at the beginning of your career but compounds over time.
Overall it's probably a wash. You'll be comfortable financially either way, but there's a lot more upside in PE albeit with significantly more risk. I'd venture to say exit opps are better from a well-known EB than from a no-name LMM PE firm but that depends on what you want to do (e.g. F500 corp dev vs. VP finance of a MM company). At the end of the day they're two different jobs and you'll probably excel at (and make more money in) the one you enjoy better.
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.
Is it fair to say the risk-adjusted return of IB VP/D/MD is higher than that of PE VP/P? Of course PE comp is higher due to carry, but (as already mentioned on this thread) the odds of making VP and then making partner in PE are far far lower than the analog in banking and it’s completely performance-dependent (as is carry)
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).
Insightful answer. I am not in PE, so apologies for the basic question that I've always wondered about. I have a friend who is a partner in PE. He told me how much DAW he has. Usually, when people in the industry quote a figure like that, does it refer to his aggregate carry at work in all the funds like in your example above? Or does it refer to just for a single fund? Thanks!
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.
Might be a stupid question, but when is an investment professional’s carried interest actually paid out and hit the bank account? I know a lot of funds claim to have a life of ~10-12 years, so do you not see anything hit the bank account until all the investments are liquidated at Year 10-12? If your carried interest has a 7 year vest, that just means you’re entitled to your whole carried interest amount after 7 years, but doesn’t necessarily mean you get paid anything until the fund/portfolio is liquidated...? Also, some funds don’t even sell off some investments at the end of the fund life, so do you basically give that carry up until they’re eventually sold down the line and return cash to LPs first?
Apologize if this is a simple topic but I am confused on when you actually get paid the carry. It seems like you have to be super patient if you don’t see a single dollar of your carry hit your bank account until 10-12 years afterwards, but maybe I’m thinking about this all wrong.
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.
Thank you, that was extremely helpful in understanding. Speaking of the J-curve, do you happen to know how long a fund life is for secondaries funds? I know their investment periods are 3-4 years, but is the harvest period much shorter than regular PE buyout funds since they are investing in the middle of the J curve? Meaning you get your carry faster in secondaries (albeit smaller amount since they charge 10-12% rather than the normal 20%)?
No perspective on the secondaries side of the business. Sorry.
Thanks. Appreciate the response.
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