The Private Equity Compensation Primer
Investing jobs are one of the few career paths in which it’s entirely possible to double your compensation every couple of years. A successful investment fund has the opportunity to generate profits at an exponential rate and a fund’s size can scale independently of the number of investment professionals.
Entry level roles in private equity already pay a high amount, with 25-year-old private equity associates at top funds earning in excess of ~$300k. And if you’re able to climb the ladder at a well-performing fund, then you’ll continue to see your compensation grow every single year.
It’s often difficult to get clear compensation data for private equity because of the scarce number of data points and relatively secretive nature of the industry, but we’ll do our best to scrape reputable sources.
In this post, we’ll go over data primarily made available by Heidrick & Struggles, a private equity executive search firm. I’m also old enough now where I have a clearer picture of what mid-level private equity people actually make.
In this post, we will discuss the different components that influence a private equity employee’s compensation.
Compensation in private equity is most directly influenced by the following factors:
Seniority of role (more senior = more compensation)
Size of fund (larger fund = bigger investments = more potential profits)
Performance of fund (better investments = more potential profits)
Private Equity Ladder and Seniority
It’s important to understand the organizational structure and different levels of seniority in private equity. It’s common for each promotion level to result in a 50-100% increase in compensation, e.g., the jump from Associate to Vice President can result in a 100% increase in your overall compensation.
Just like in investment banking, the more junior roles at the Analyst and Associate level focus primarily on building models, doing nitty gritty analysis, and other tactile diligence streams. The Analyst and Associate are most commonly pre-MBA. Analysts are hired out of the top finance schools in the world (Penn, Harvard), while associates are hired from the top investment banks in the world in a very comedic recruiting process.
The mid-level roles, which are typically given the title of Vice President or Principal, have more to do with execution. This is a fairly broad mandate, but it can include things like helping outline an investment memo, revising term sheets, scoping out industry landscapes, and liaising with consultants / lawyers.
The specific designation of Vice President or Principal differs at each firm – sometimes Principal is the equivalent of Senior Associate (like at KKR) and sometimes it is the role right before Managing Director.
The most senior role is Managing Director and Partner. These professionals are focused on sourcing new deals, making investment decisions, and leading the organization. The average compensation of these individuals is hard to identify and generalize because it becomes primarily dependent on the performance of a fund.
You get a lot more equity at this level, so if the fund performs well, you will get paid a lot.
Analyst (0-2 years of experience): $150-$200k
Associate (2-4 years of experience): $250-$350k
Vice President (5-8 years of experience): $400-$700k
Principal (9-12 years of experience): $800k-$1.5mm
Managing Director / Partner (10+ years of experience): >$1.5mm
These figures pertain to what the largest North American funds pay. These figures also represent an average across a wide cross section of funds, so you’re bound to see a moderate amount of variation.
It’s also worth noting that this compensation comes in a combination of base salary, bonus, and carry (investment profits). It’s common for a private equity professional’s base salary to represent less than 50% of their overall compensation. Base compensation is the salary that is regularly paid out on a biweekly basis. Bonus is typically paid out once per year (often at the end of a calendar year). Carry is less linear and is distributed as companies are sold or dividends are paid out.
Private Equity Fund Size
Aside from an employee’s seniority, the other most significant factor determining one’s compensation is the size of the fund. Larger funds are able to buy larger companies and can therefore generate larger profits. However, you don’t always need to scale an organization or personnel in order to get those larger deals. All else being equal, buying a larger company will result in potentially larger profits from a dollar perspective.
For example, a lower-middle-market fund acquiring a $10mm business is still going to need a few investment professionals to close a deal. At the very least, you’ll need a Partner to sign off on the deal and likely a mid-level employee to do the diligence, modeling and execution.
On the other hand, if you’re at a top mega fund, you’ll be chasing much larger deals, but your deal team isn’t going to grow that proportional amount. At a mega fund, you might chase >$1B deals, but your deal team might still only be 5 or 6 people. Accordingly, if the $10mm and $1B companies have identical investment structures and return profiles, the $1B deal will have meaningfully larger profits by virtue of its magnitude.
This tends to be why firms like to raise larger funds and chase bigger deals, sometimes at the cost of investment precision. This is why the largest hedge funds often eventually gravitate towards being overall asset managers – you have the opportunity to make the most money if you can deploy the largest funds.
Using the associate position as an example (due to the relatively larger number of available data points), we’ll be able to see how compensation fluctuates significantly depending on fund size. Per the Heidrick & Struggles report, we can see that an associate at the largest fund can make twice as much as someone at a sub $500mm fund.
This is why there is so much competition for mega fund and upper middle market fund roles – the compensation can be twice as much if you are at a top fund. Fund size plays a huge role in compensation.
This divergence in compensation is also why many people opt to stay in investment banking as opposed to pursue lower-middle market roles. The compensation at a large investment bank is often much higher than at smaller private equity funds.
One important structural point about fund size is that it tends to be much harder to climb the career ladder at established mega funds. Even if you’re a brilliant hard-working private equity vice president, there’s no guarantee that you’ll be able to move to the next level. Your competition will be filled with other brilliant hard-working individuals. As such, it’s ordinary for mid-level people to move to more senior roles at smaller private equity funds to progress their career.
Private Equity Fund Performance
The final most significant factor influencing one’s compensation is the private equity fund’s performance. Performance is one of the hardest things to gauge and can fluctuate on a year-over-year basis. This is also because private equity deals with private investments, which can be difficult to value.
Even if you were a pension fund investing in one of these private equity funds, you might still not accurately know how well a fund is doing. Private investments are illiquid and valuing certain investments in their early years can be relatively meaningless.
I do think it’s worth noting how much fund performance does matter at the mid- and senior-levels though. Once you get carry, your earnings potential can be 2x or 3x higher if you’re at a top-quartile vs. a third-quartile fund.
The difference between a fund earning a third-quartile return like 10% vs. a fund earning a top-quartile return like 25% can easily be a gap of several million dollars per person.
We can see how the “first quartile” funds denoted by Q1 are in the low to mid 20% range, while third quartile is closer to 10%.
For illustration, a $1B fund growing at 10% annually will be valued at ~$2.5B at the end of 10 years, while an equivalent fund growing at 25% annually will be valued at ~$9B. In terms of profit, the second fund will have around 5x as much profit to distribute to its employees. The below chart (figures in millions) illustrates this visually.
Practically speaking, these wide gaps in performance occur all the time.
Top technology funds like Thoma Bravo, Vista Equity, and Silver Lake have been able to post mid 20%+ annual returns on the advent of SaaS and software businesses. Despite doing comparably similar work, a Vice President at a similarly sized fund might only take home a fraction of someone at Thoma or Vista does.
It's easy to see how private equity can pay so much when you consider its business model. A top-performing fund that invests in large businesses will have a huge amount of profits to distribute to its employees. While starting salaries may still be comparable to the top salaries as an engineer or product manager, the real divergence in pay becomes evident at the mid level and beyond.