eFinancialCareers

Private equity is the promised land for many junior bankers. But pay is being spread more thinly as the number working in the industry rises.

The Australian market for private equity professionals remains small but has shown “dramatic growth” in the last three to four years, says Victoria Biggs, a consultant with Jon Michel Executive Search.

Biggs estimates that the entire venture capital/private equity industry employs “400 to 500 people” in this country – which means about 20 to 25 new hires a year, up from just three to four in 2003.

Base salaries in private equity are comparable to those in investment banking, but the bonus side is “generally lighter”, says Biggs. “Where an investment banker with five years’ experience might be on 1.5 times your base as a bonus, in private equity that could be somewhere between 50% and 100%.”

The attraction that makes the difference is the lucrative carried interest, or ‘carry’. This is the proportion of profits that a private equity fund’s investment team receives after a certain internal rate of return (IRR) has been reached and the investors are paid out, and it can be worth several millions.

But as teams become larger, Biggs cautions that carry is being “shared between more mouths”.

“There might be 15 professionals on a team, and clearly the carry can’t go as far as it did when there were only three or four. As the industry grows, the amount of carry that’s available to the people in the team can decrease,” says Biggs.

Lynne Muirhead, a consultant at Johnson Executive Search, says that candidates looking to move into private equity have to look carefully at not only the size of a firm, but where it is in its investment cycle.

“If you were going into a large firm, there’s a chance that it will have the opportunity to raise more funds on an ongoing basis, which gives you more opportunity to get into a carry scheme and be attributed points quicker.

“But if you’re going into a small firm that is in the advanced stage of the investment cycle – say, three years into a fund with a five-year payout – it could be a couple of years before you get any meaningful carry attributed to you. Depending on the market, the bigger firms have greater capacity to raise money and potentially have cycles starting all the time, and candidates have to keep that in mind,” says Muirhead.