A larger slice of the pie

Salaries for junior staff in Europe are rising faster than for those at the top of the tree. What is driving the numbers?

In a climate of healthy fundraising, and with forecast macroeconomic decline yet to take full effect, private equity salaries are trending ever higher, according to recent research from executive search firm Heidrick & Struggles.

The firm’s latest survey of European private equity salaries shows top-tier executive salaries climbed 2.5 percent in the last year, with the average total compensation package now €650,000.

But the professionals at more junior levels are really cashing in, with associates seeing a 13 percent rise in salary, to an average of €177,400.

Deep pockets

The surge in starting salary for junior members of staff is a new trend driven by increased competition from other sectors, says Tom Thackeray, a principal at Heidrick & Struggles, and co-author of the research.

“Overall salary increases at the junior end are being driven by higher cash compensation levels for entrants into the industry, such as those transitioning from investment banking. New entrants across all roles are seeing a

13 percent annual rise in compensation on average, with new investment professionals receiving a 13.5 percent rise,” he says.

Gail McManus, managing director of PER, a private equity search firm, agrees, saying entry-level salaries are where most of the salary growth is focused in the industry, though they do not compete with private equity’s talent rival, investment banking. “The base salaries paid in investment banking have risen slightly in recent years, but junior-level bonuses have gone up significantly, up by 100 percent in some cases,” she says. “This has a knock-on effect on private equity salaries, but private equity pay doesn’t ever beat investment banking.”

A smaller talent pool is also pushing up salaries for new starters. The banks are reducing their hiring, but the tech sector has also emerged as a competitor for the brightest minds.

“Investment banks had smaller intakes following the financial crisis, which has had a knock-on effect on private equity,” Thackeray says. “The tech sector is actively competing with financial services for talent, hiring high-potential candidates who are looking to work at the next Facebook or Google.”

A macro driver of salary trends in private equity is the size of the funds being raised, adds McManus. “In my opinion, the larger fund sizes being raised now have contributed to [larger salaries]. The bigger the fund size, the more management fees being charged, and the higher the salaries people can be paid.”

In terms of geography, Germany topped the list for the highest paid private equity executives in Europe, beating the UK for the first time.

“It’s the first time in five years [since the inception of the study], that German-based partners and associates are paid more than their UK compatriots,” says Thackeray. “Many firms continue to believe Germany is a strong hunting ground for private equity deals and that the largest European economy is an opportunity for growth. The desire for locally based investment professionals is driving the higher salaries.”

Stiff competition

The skills required to work in private equity are scarce, another factor that pushes up the numbers, says McManus.

“There are always many people who want to work in private equity, but the competition is tough. That has to do with whether people can meet the requirements of the job, rather than the number of jobs available,” she says.

The applicant to vacancy ratio can be 300:1, and the person who gets an offer often has two to choose from.

“For that reason, private equity firms do compete for the same people, as the number of people with the right competencies is small,” she says.

Further competition comes from LPs who have started hiring private equity investment professionals to do direct deals. Unable to compete with the industry’s carried interest incentive, LPs are using a different approach.

“Large LPs, doing direct deals are using long-term incentive plans, which are annual rewards on some pre-arranged future schedule. These compensation plans are more predictable and are awarded sooner than carry, plus they’re not as unpredictable as carried interest,” says McManus.

Getting a raise

While the data show junior staff are well incentivized, principals are getting a year-on-year pay rise. It is, however, smaller in percentage terms than it has been in previous years. They now earn an average €342,000 a year, compared with €328,000 in 2016, the research found.

McManus says a principal’s pay often benefits from at least one increase before they move into a senior management role.

“It’s rare that a person spending three years as an associate would not have one pay increase during that time. Salary is an oft-used retention tool in private equity,” she says.

The latest figures show European and US salary growth has slowed somewhat, but could anything reduce base compensation in the current climate?

“There’s lots of dry powder in the asset class, so we don’t expect a downward trend in salaries just yet,” says Thackeray. “We also haven’t seen any ‘Brexit effect’ on private equity as it stands. The industry has had to continue to invest and harvest its assets with no clarity on the implications of Brexit.”

There is little way of checking private equity remuneration, particularly at entry level. The industry’s reliance on the talent pools of investment banking, professional services and strategy consulting mean that a reduction in hiring in those industries has an impact on private equity’s ability to fill positions. With the tech sector’s enticing proposition making hiring even more difficult, salary rises are likely to persist. For the industry as a whole, it seems only a macroshock will bring salaries down.