Compensation Structures at PE Firms

I am weighing an opportunity to join a unique PE opportunity as a Principal/VP.
Can you share with me how compensation at that level is structured?

This is a difficult question to answer because internal firm structures vary considerably. A common structure is a partnership structure used at VC firms. An alternative is more of a corporate structure. At any firm, whether it be a PE firm or a Law firm, there is always going to be an Inner Circle of Founders and Partners.

Given the evolution of Private Equity, it is clear that the partnership structure is more old school and the "institutionalization" of firms has brought about a corporate ladder. I have always felt that one of the weaknesses of the partnership system is that it is nearly impossible to break into the Inner Circle. Either you have to climb the ladder for too long or you need to hit a huge winner. Either way, this obstacle is the primary reason that firms have trouble retaining their stars. Either they let them join the Inner Circle or they will end up being your competition. Not that I want to mention Blackstone again, but their $40 billion valuation would beat Lehman Brothers $39.5 current value (both Blackstone founders were previously at Lehman).

Even though this reader's question is about compensation at the Principal/VP level, I am mentioning the Inner Circle because the objective of anybody at at PE firm should be to learn the skills necessary to run the show. It simply isn't in the personalities of most young ambitious financiers to one day become the second or third guy in charge. Those that are second or third are likely to be patiently waiting the changing of the guard. Otherwise, those guys are the type that probably never imagined being there in the first place and are more than satisfied with their wealth and their extracurricular activities.

One other difficulty in talking about compensation is that nowadays firms have so many levels within their ranks that it is difficult to gauge who actually does what. I would say the more common spectrum is this (with some having multiple levels):

Analyst
Associate
VP
Principal
Director
Managing Director
Partner

The main difference between firms is how much carry is shared with the lower tiers and how many levels of lower tiers there are. At many firms, you will not share in the carry until you are a Director. At some firms, you will at the VP or Principal level. At some you will at the Associate level. It is rare to see a piece of the pie given at the Analyst level.

What is confusing is that duties for a given title vary among firms. This also depends on firm size and number of employees. I don't think that the Analyst/Associate duties have changed much, but in between that level and the Inner Circle, things tend to blur a bit.  To make matters worse, some have titles that aren't widely used, such as Capital Raising Specialist. 

I would say that at the Principal/VP level compensation ranges from 200k to 400k with half or equal as a bonus and a carry that can be up to 10 times that amount. I don't have any statistics or hard data to support that and given the PE boom these last few years those numbers could be way off. As you can see, what is important is the carry.

You need to take what I am saying with a grain of salt. Compensation will vary according to fund assets under management, years of work experience, contribution to successful deals, graduate degrees, and other things that are out of your control.

Comments

[Rob Wurth]

This may or may not help answer the original question. It was a response given to me when I asked a similar question. Unfortunately, I was asking about lower-level positions w/in PE. But it may still provide some additional information:

"My comp at [pe company x] as a senior associate (2 years out of Business School) was $425,000 all-in. The current rate for a good analyst with 2+ years bulge bracket I-Banking experience (pre-MBA), in NY is 150k-200k (again all-in). Carried interest is a very complex topic, but the industry standard is that once a PE/VC fund has met its minimum return (hurdle) rate (usually 8%-13%), the excess returns are split 80% to investors (LPs), with the other 20% going to the GP (investment professionals). Partners grab the lion share of that 20% but there is usually a cut for the pee-ons to get a fraction of a percent (referred to as points of carry i.e. 50 points of carry = 0.50%) of the fund's returns over the hurdle rate. Over the life of the typical fund (10 years), 50 points of carry can be worth $2-$5 million in a small shop or $50 million in a large mega fund (TPG, KKR, Providence, APAX). As you rise in the foodchain (promotions) they usually juice your comp with more carry as time progresses."