IB Associate with PE Offer (package question)

Hi all.

I am currently an Investment Banking Associate (1) at an Elite Boutique in Australia. I have approximately 4 years of Investment Banking experience. My currently base is A$180k and receive a bonus of ~80%.

I received an offer as an Investment Associate at a mid-market Australian private equity firm. The firm has 3 funds. The first returned ~4x net multiple and 40% net IRR.

The second fund (A$170m) is 80% invested and has returned ~50% of capital to investors. It is in year 5 of fund.

The firm last month raised its third fund (A$350m).

They have offered me the following package:
- Base: A$130k
- Carry - Fund 2: 1.00%
- Carry - Fund 3: 1.25%
- Opportunity to co-invest

No bonus or STI.

At the Investment Manager level (~4-5 years away), your carry is closer to 5.00% and you are looking at a ~$250-300k base salary. So it is likely that by time they raise Fund 4, my carry will be closer to that 5.00% mark.

So my question is, what do you think about this offer? It is interesting that they offered carry as a 1st year associate, however its a big step back in salary and with no STI, your immediate loss of income per year is ~A$180k.

So for ~3 years until you start receiving your carry, the opportunity cost of leaving banking would be ~$700k.

I find it quite hard to accept and immediate loss of income per year of ~$200k.

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Comments (9)

Most Helpful
Aug 3, 2018 - 10:09am

Why don't you run some analytics on some hypothetical numbers? Use assumptions for proposed fund returns over a given period, and apply your carry towards those returns to see your share of carry in each fund. The returns would likely have to be probability weighted because they're obviously not guaranteed. Once you get the total carry number, divide that amount by the number of years it took to realize, add the yearly carry amount to your base comp, and compare that total number to the comparable comp you would have received at every stage in banking.

I personally wouldn't go for this deal. The issue I have is that you are assured the certainty of losing ~200k a year for the uncertain gain of $X in the future. Losing the short-term incentive bonus for me is a deal breaker. In order for this proposition to make sense financially, the two sets of risks you're incurring ( 1) immediate downside financial risk offset by non-guaranteed potential future gains, 2) time value of money you are not receiving today) have to be offset by meaningful upside in total comp when you receive your carry. Basically, when adjusted for probability of success for reaching any give number in a year at your fund, your PE number with carry would have to be substantially higher than the number you would have received in banking, to justify the risk.

That's just the way I would think about / look at it.

Alternatively, if you're really set on PE, you can look at the short term financial loss almost as a sunk cost, in order to achieve meaningfully higher comp at some distant point in your late career. This approach would be based less on analytics and short term financial rationale, and basically more on taking a chance on your fund's long-term performance / your long term performance.

Aug 3, 2018 - 2:27pm

I'm in a very similar position to you.

- 1st year IB Associate (A2A promo)
- Group culture is off the charts: hours are 60-70 range (high as 90 during final months of deals); no competition at junior level; good visibility on moving up within the group (all this to say it is very difficult to leave)
- Offer on table from PE firm with a substantial paycut (>25%). Group culture, responsibility they'll give me etc. all check out and meet expectations.

I'm think I will move to PE firm based on the following reasons:
- Learning curve has definitely plateaued at I, more learning and development at PE Firm
- Window to leave banking is closing, if I want to come back later I can, but if I don't leave now I'm stuck
- Did some preliminary modeling of compensation over time and PE wins on an NPV basis even with conservative assumptions

Yes taking a paycut is a huge negative at this point in my career (gonna take longer to buy that porsche), but I'm young enough where I'm willing to forgo income now for a chance at larger checks in the future. It's not like I'll be getting paid middle class, I'll definitely still be in the 1% or very close to it, but yes it did take a while to wrap my head around take a paycut.

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Aug 3, 2018 - 5:35pm

$170M is quite a small fund so I am assuming that there isn't a ton of money around to pay cash bonus so I don't think your expectations that they match your banking salary is realistic. A lot of people don't realize that in PE, past the associate level, people pretty much always have lower cash comp than they would at a similar level in banking. Obviously, carry generally makes up the difference. As others have mentioned, the door is rapidly closing on your getting to the buyside so I would think more about what are your long-term career goals. If comp is more important for you, then I would advise to stay in banking.

Aug 4, 2018 - 10:27pm

All. Thanks for your comments. They were very helpful. Completely understand that the salary, etc. would not be equivalent to banking immediately. However, the loss of a short term incentive + ~$50k less salary means you are taking a nearly 50% pay cut.

That is a very large drop in total remuneration... And you will likely earn 50-60% less over next few years until carry starts kicking in.

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