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Strong fundraising, mega-fund hiring drive private equity compensation to new highs

The record amounts of capital that have poured into private equity over the past year continue to drive increasing compensation levels in the industry, according to the 2008 Private Equity

The record amounts of capital that have poured into private equity over the past year continue to drive increasing compensation levels in the industry, according to the 2008 Private Equity Compensation Report, an in-depth analysis of compensation at US-based private equity funds released by Glocap Search and Thomson Financial.

Compensation for nearly all positions covered by the report – analyst, associate, senior associate, vice-president, principal, partner, chief financial officer, controller and administrative/executive assistant – increased from last year’s levels with some of the largest increases coming at the associate and senior associate levels.

The driving forces behind the rise in compensation, according to the report, include fundraising by mega-funds (defined as those with more than USD5 billion in assets), which led to continued demand for junior and mid-level support, driving compensation higher at that level.

As the mega-funds raised compensation, other funds followed suit for similar reasons – to stay attractive to top talent and retain their own key professionals. Private equity firms also had to contend with hedge funds, which continued to disrupt private equity hiring at most levels and in doing so put additional pressure on compensation.

According to Glocap senior partner Brian Korb, the continued surge in fundraising and deal size have dramatically altered the dynamics of the industry to the point where the premium for top talent has reached unprecedented levels.

Doing what it takes to bring on the best talent goes hand in hand with the current nature of private equity investing in which billions of dollars are on the line, he says, adding: ‘The stakes are high for top talent, and more funds seem willing to step up to the table than back down.’

The results of the survey indicate that compensation increases significantly as the amount of capital under management rises. As the larger funds have increased compensation, the discrepancy between larger and smaller funds has become more pronounced.

The report found that total average cash compensation for associates at buyout and growth equity funds was up 12 per cent, the largest increase at this level for any of the three asset classes in the report. The gains were led by funds with between USD2bn and USD5bn and those USD5bn or more in assets, where total average compensation was up by 16 per cent and 22 per cent respectively. By contrast, total average compensation for associates at the smallest buyout and growth equity funds – those with up to USD300m and between USD300 and USD750m in assets – rose by 4 per cent.

The largest buyout and growth equity funds, with USD5bn or more in assets, are now paying senior associates, many of which include new MBAs, close to USD420,000 on average in total cash compensation, a 9 per cent increase over 2006 levels.

Total cash compensation for senior associates at large venture capital funds and funds of funds rose by 9 and 10 per cent respectively to USD276,000 and USD241,000 on the back of strong increases in bonuses. Both types of funds are competing more with traditional later-stage private equity funds for some of the same candidates and further adapting a more bonus-heavy compensation structure.

Noteworthy gains at the vice-president level occurred at funds of funds with USD2bn or more in assets, where total cash compensation rose 9 per cent to USD301,000, while bonuses at those funds surged 19 per cent from 2006 levels. By contrast, total average cash compensation for vice-presidents at funds of funds with up to USD300m in assets increased by just 1 per cent.

Vice-presidents at mega-buyout funds saw total average cash compensation rise 8 per cent to USD660,000, more than double the average USD279,000 compensation for a vice-president at the smallest private equity funds.

Total average cash compensation for principals at the largest buyout and growth equity funds rose 11 per cent to USD848,000, well over double the average total cash compensation at the smallest funds (USD368,000).

The report, the seventh annual survey of compensation in the private equity industry, analyses base salary and bonus compensation for thousands of professionals at later-stage private equity – buyout and growth equity – funds, venture capital firms and private equity funds of funds for the years 2004 through 2007-08.

The Glocap-Thomson report derives compensation data from a combination of actual placements executed by Glocap Search, candidate data maintained by the firm for its search business (including expected bonus information) and input from recruiters, fund professionals and human resources personnel.

Glocap is a retained executive search firm focused on the private equity industry and has a global practice placing investment professionals at all levels from general partner down to analysts as well as substantial practices placing chief financial officers, controllers, chief operating officers, administrative/executive assistants, and marketing professionals into buyout and growth equity funds, venture capital funds, private equity funds of funds, hedge funds and funds of hedge funds.

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