Bonuses explode in “private equity”

In the United States as in Europe, the managers of the unlisted reap the wage increases. They were still 41% in 2018 to witness an increase in the European Union of up to 40%, according to Heidrick & Struggles.

Stephen A. Schwarzman, boss of the world's number one unlisted Blackstone, remained the highest paid boss in private equity last year after receiving $ 567.8 million in compensation and dividends.  His fortune is estimated at $ 13.2 billion by Forbes.

More than 25% net in four years. On Wall Street, “private equity” is the only financial industry to be able to boast of such a dazzling jump in remuneration, according to the recruitment firm Johnson Associates. Conversely, in investment banking, asset management and hedge funds, salaries and bonuses have barely returned to their 2014 level.

European private equity is no exception. According to the firm Heidrick & Struggles, 41% of European managers report an increase in remuneration of 11 to 40% for 2018. In previous years, they were already 30 to 48% per year to report such progressions. “Salaries are always on the rise. There is a lot of pressure on the market, in particular on the first place of the unlisted, in London ”, testifies headhunter Diane Segalen. In 2018, the “partners” of very large funds reached more than 1 million euros, excluding capital gains on the sale (“carried interest”) which represented thirteen times more.

Explosion of commissions

Income, bonuses and capital gains jump with the explosion in the size of funds, which have more than doubled the amount of their capital raised since the crisis ($ 714 billion last year worldwide, including $ 91 billion euros in Europe according to Preqin).

Carlyle’s latest vehicle grew by 42% to $ 18.5 billion, Hellman & Friedman’s by over 46% ($ 16 billion), EQT’s by 59% ($ 13.2 billion). And we can no longer count the funds which, in Europe and in France, are doubling in size like Ardian. The base of the management commissions, of 2%, that investors pay to the managers to remunerate them, thus doubles with the size of the funds. “The growth of recruitments is not as fast as that of capital, indicates Olivier Millet, member of the Eurazeo management board. The industry was not necessarily prepared for this explosion. “

Young people difficult to recruit

The natural pool of recruits from the non-side, the investment bank, attracts less applicants, also notes Tom Thackeray, partner at Heidrick & Struggles. And the tech industry is competing.

Result, “Managers are obliged to pay more young recruits”, he said. In Europe, financiers with two years or no experience have seen their total base salary and bonus increase by 37% in two years, to 135,640 euros, and those between two and four years, by 29%, to 221,360 euros. .

An increasingly competitive banking market

Private banks are competing for the clientele of unlisted managers. “The margins on the ‘carried interest’ financing contracted with the arrival of new specialized players”, notes Philippe Lefébure, head of financial entrepreneurs at Neuflize OBC. Managers who borrow money to invest in their fund can, for the best of them, get rates of 1 to 2%. Banks are accommodating with young people who already have experience and take as collateral the flows of ‘carried’ from previous funds, even life insurance. But these credits are above all for private banks an investment that aims to enable them to capture additional income. The situation is more complicated in the venture: “Future income is less certain than in an LBO. “

An El Dorado that has its reverse. In order to claim capital gains from the sale – “carried interest” in the jargon – which supplement the base salary and the bonus and which in reality constitute the main part of the remuneration, the financiers must commit to the funds at less 10 years in order to reach the phase of sale of the participations. “We anticipate difficulties when we have to integrate Millennials, because they do not stay on the long term”, says one at a large British fund.

Strong funding constraints

But to receive these capital gains, the managers are personally required to invest together around 1% of the size of their fund. A financial constraint when the billion is crossed. “When teams get started and develop new ‘small cap’ strategies or very long-term funds, investing in ‘carried’ shares can be difficult, especially for young people”, also notes Diane Segalen.

But if there is one segment that makes new recruits dream, it is that of tech funds. But it is there that they are paradoxically the most tested. “Unlike the ‘large cap’, where the management company can help finance the ‘carried’ at a zero rate, in the ‘venture’, these companies do not have sufficient size and the managers can hardly get into debt because they are riskier investmentsadds Diane Segalen. Out of fifteen companies, you have one that does all the performance, nine that go to the mat and the rest that survive. “

But the worst, underlines Diane Segalen, are the debt funds which are currently booming: “It’s enough for a company to fail and the fund’s performance is jeopardized.” » Bonuses and capital gains with.