Note: If you have just landed here and you don’t have the faintest idea what Private Equity is, I recommend you to read our article about Private Equity
When talking about Private Equity compensation, there are 3 main things: Salary and Bonus range, Compensation system, and Private Equity Revenue structure. If you want to make a fortune, Private Equity is a good fit for you. Why? Let’s take a look!
1. Private Equity Salary Range
1.1 Overview of PE Salary Range
The salary ranges in the US, Europe, and the Asia Pacific are different. The US is the most ideal working place when it comes to Private Equity. Even though the base salaries in Europe and the Asia Pacific are lower, PE is still the top priority of most people who want to be in the Finance Industry.
|North America||Salary||Bonus||Total (*)||Salary||Bonus||Total (*)|
Source: Heidrick & Struggles 2019 survey
Note: (*) Because firms can offer high salary but low bonus or vice versa, Total salary and bonus is taken from the survey, not by adding salary and bonus together
(**) High salary and bonus here mean this is the highest response available in the survey.
Due to small sample size, Analysts are not included in the survey. Normally, an Analyst will receive total package from $100K – $150K per annum
These figures are only approximations so you can have an overview of how the people are paid in this industry.
Typically, the ratio between salary and bonus is 50/50 for junior employees, such as Analysts, Associates and Senior Associates. The higher you are in the ladder, the bonus will have more weight in that ratio.
Important note: The salary might be lower in funds having less than $1 billion in AUM (asset under management), for example:
- Senior Associates salary base and the bonus are around $200K.
- VP and Principle might earn $300K and $400K respectively.
- Private Equity Partner salary is likely around $500K – $600K.
1.2 Salary in Private Equity vs Investment Banking
Let’s make a quick comparison of the salaries between 2 powerful industries in Finance to see which industry pays the best!
|Position||Private Equity||Investment Banking|
|Analyst||$100K – $150K||$150K – $200K|
|Associate||$150K – $300K||$250K – $400K|
|Senior Associate||$250K – $400K||–|
|Vice President||$500K – $800K||$500K – $700K|
|Principal||$700K – $2,000K||$500K – $1,000K|
Source:Heidrick & Struggles 2019 survey, Firm research
In Investment Banking, total compensation is highly dependent on individual, team performance, and the market conditions. These numbers are lower at smaller banks and outside the U.S. When you manage to senior level, you will be paid in stock rather than cash at some bulge-bracket banks.
In Private Equity, the bonus portion is higher, if you perform well, you not only earn high salaries and bonuses but you also earn from the carry (the profit share from investment returns) in the process. You won’t receive any carry until you get to Senior position and the carry will be larger when you get to higher positions.
2. Details about Compensation and Carried Interest in Private Equity
Most of the private equity funds are formed as limited partnerships between one General Partner (GP) and many Limited Partners (LPs). The LPs contribute the majority of the capital, meaning they earn the majority of the investment profits if the fund is successful.
Important note: Limited Partners (LPs) include some type of investors such as pension funds, funds of funds, sovereign wealth funds, and high-net-worth individuals.
While the LPs earn most of the profit from the investment return, the firm gains by charging the management fees from LPs. The fee is used for covering the operation costs within the funds.
For many decades, the fee is around 2% of the total funds raised. 2% seems an insignificant percentage but with this fee structure, it’s enough for Private Equity to be in the list of top-paid salary industries. If the fund manages to raise 1 billion for the 5-year investment period (usually 5-10 years), the fund will receive $20 million annually, not to mention the returns on its investment projects. After the investment period, the fees might become net invested capital instead of committed capital.
There are other fees beyond the management fees, such as deal fees. In the mega-funds (funds that manage more than $5bil Asset Under Management), Deal fees are often called Net monitoring and transaction fees. Those fees are charged regardless of performance results. The fund charges this fee directly to portfolio companies and can be up to 20% of the total management fees.
Besides the management fee, the investment returns are the most important income of Private Equity. This is also the most important factor to decide the bonus that PE folks receive, which will be discussed in the next part.
2.1 Private Equity Compensation Structure
Private Equity salary and bonus structure are complicated. The base salary is covered by the management fees or the deal fee, while the bonus comes from the investment return. In the investment returns, there are 3 components: individual/fund performance, co-investment, and carried interests.
This type of bonus is covered by the management fee and it depends on an individual, team, and fund performance. Typically, the split between base salaries and bonuses for junior positions (Analyst and Associate) are around 50/50. The higher level you are in Private Equity, the bigger bonus you will earn.
When you reach the Associates level, some firms allow you to put your own money into specific deals. At this time, you can use your personal fund to invest in any project and you will gain the benefits if it performs well.
Carry or Carried Interest
Carried interest is mostly available to VPs, Principals, and Partners/MDs. If you are not senior, you cannot see most of that carried interest. The Partners of the firm receive most of the carried interest pool because they contribute most of the initial investment. This type of interest is defined based on the percentage of the total pool for each fund, and it vests over several years (often 5 years or sometimes up to 10 years).
Normally, carried interest represents a share of investment return paid to General partners (GP) in excess of the amount he or she contributed to the fund. Carried interest acts as a performance fee, meaning that the firm only receives carry if the investment’s IRR is higher than a committed return rate called hurdle rate. As carried interest is pretty complicated, we dedicate one whole session to talk about it.
2.2 Mechanics of Private Equity carry
Let’s take an example, your firm raises $1.5 billion and turns it into $3 billion. To be more specific, in year 5, your firm successfully turns the initial investment into $3 billion.
The distribution split agreement between LPs and the GP is 80-20. In year 0, the LPs contributed $1.3 billion in total, while the GP contributed $200 million. The hurdle rate is 8%, so the fund needs to earn an 8% IRR before it can earn anything else.
This hurdle rate seems to be the pressure on the GP side but it’s a key tactic helping the funds to call for capital from LPs. Investing in illiquid assets, such as private equity firms, is a risky decision to make so they expect higher return. If the fund’s IRR is only 5%, the LPs will skip private equity and invest in bonds or other industries. After the LPs receive proceeds up to the 8% IRR, the GP can earn its 20% profit.
Back to our previous example, we will demonstrate here how the funds are distributed in Year 5 with below assumption:
- All the capital was successfully raised in Year 0 and earned back in Year 5 (It is not often the case in reality. That capital can be raised by phases, not at once all in Year 0)
- The split between LPs and GP is 80/20
- The hurdle rate is 8%, meaning that the firm has to reach a minimum 8% IRR before getting any split.
Turning $1.5bil investment into $3bil by year 5, this private equity firm reaches 15% IRR, which is above the hurdle rate.
At this point, someone can jump in and calculate quickly the profits of LPs and GP
- Return profits: $1.5 bil = $3 bil – $1.5 bil (investment in Year 0)
- LPs’ profits: 80% * $1.5 bil = $1.2 bil
- GP’s profit: 20% * $1.5 bil = $ 300 mil.
All the numbers are right. However, we have to use a different approach, which involves the principle that LPs get proceeds up to 8% IRR first.
- As IRR is 8%, LPs expect that the initial $1.3bil investment will create $1.910bil at the end of 5 years.
- Investment profits for LP at 8% IRR is: $1.910bil – $1.3bil = $610mil. They also got back their initial investment, which is $1.3 bil.
- Because GP can deliver the minimum IRR, GP will receive $153million to catch up with the split 80/20 ( $153/ ($153 + $610) = 20%).
- Remaining proceeds from the investment profits are $3bil – $1.3bil – $610mil – $200mil – $153 mil = $737 mil.
- The split 80/20 is applied again with the remaining. Hence, LPs get $737mil * 80% = $570mil; GP get $737mil *20% = $147mil
- LPs receive their initial investment of $1.3bil and $1.2bil profits in Year 5. They earn a 1.9x multiple and a 14% IRR
- GPs get their initial investment of $200mil and $300mil profits in Year 5. Finally, they get a 2.5x multiple and a 20% IRR.
From this example, although contributing less, GP, or the PE firm, gets higher multiples and IRR than those of LPs. Carried interest can be very lucrative but it’s quite dangerous and stressful. If things go the other way, for example, if the fund can grow only $1.8 billion at the end of 5 years, the IRR will be 7%, less than the minimum of 8%. Since it’s below the hurdle rate, so the GP earns nothing despite its contribution of $200 million in the beginning. Each LP of the firm will lose millions of dollars if there are other better investment options in the market.
2.3 Salary in top Private Equity firms
Below is the list of top 10 Private Equity firms which have the highest salaries in the US. There are only the salaries of Analyst and Associate positions in the US. From the position senior to partner, the salary data is difficult to give the exact numbers because their salary has more components involved such as carry and bonus.
Note: The data is not confident because of the insignificant sample size. However, you can take it as the reference and search on the company website for more exact information.
Total Compensation (Salary & Bonus) in some Top Private Equity firms
|Private Equity firms||PE Analyst||PE Associate|
|The Blackstone Group||$100K – $150K||$150K – $300K|
|The Carlyle Group||$100K – $140K||$129K – $260K|
|Apollo Global Management||–||$150K – $250K|
Source: Firm research
3. How to Get into Private Equity?
3.1 Typical Roadmap in Private Equity
For an overview of the chance to get into Private Equity across career paths and background, please visit our Wall Street Career Planning tool.
Basically, there are two pathways to enter Private Equity: (1) moving from Investment Banking to Private Equity, and (2) going straight to Private Equity after colleges.
Moving from Investment Banking to Private Equity
This is the most common track to enter Private Equity.
We will provide more insights about this path in section
3.2: Recruiting process.
In brief, you can move from Investment Bank to Private Equity via PE on-cycle and off-cycle recruitment.
On-cycle recruitment is organized by those Mega funds to target Bulge Brackets/Elite Boutique Banks Analysts. It often happens from August to October every year, within a few months of IB Analysts’ start date. However, each firm’s process, from submitting a resume to receiving offers, lasts only 1-1.5 months.
Off-cycle recruitment is organized by Middle Market funds and will be kicked off after the on-cycle one. The off-cycle season often runs from December to February and each firm’s process is also longer than that of on-cycle recruitment. Private Equity firms can also recruit other vacancies during off-cycle and those are need-based positions.
In big funds, there are Associates and Senior Associates levels. Both On-cycle and Off-cycle recruitment are only for Associate vacancies and there is a different timeline for Post-MBA Associate. Although it is possible for a 2-3 years experienced Associate to be promoted to Senior Associate, it is pretty challenging if you don’t have an MBA degree.
Similar to Analyst vs Associate, the difference between Associate and Senior Associate varies by firm size.
|Position||Private Equity Associate||Private Equity Senior Associate|
|Responsibility||Although Associates also deal with external parties, they focus more on deal sourcing, conducting due diligence, and running financial models. Associates can assist monitoring portfolio companies, fundraising and looking for exit options.||Senior Associates act more like the firm representatives in front of companies that look for investment. They also involve more in portfolio company’s operation.|
|Age||24 – 28||26 – 32|
|Working Hour||60-70 hours||60-70 hours|
|Salary & Bonus||$150K – $300K||$250K – $400K|
Going Straight to Private Equity after Colleges
You can land a job in Private Equity right after colleges via either Internship programs (a.k.a Summer Analyst Programs) or Full-time Analyst Programs.
Recently, this track has become more popular because some Mega-funds and Upper Middle Market funds are willing to convert interns or recruit fresh graduates for Analyst positions.
Both mentioned programs are limited, extremely competitive and, in some cases, only for target schools. You need to be a “superstar” with a stand-out resume (even target schools might not make the cut here), strong academic records. For Analyst recruitment, you even have to highlight how you are ahead of the others by relevant experience, ideally at boutique investment banks & small private equity funds , and super-smart networking to get into those limited interview slots.
For Internship Programs, after getting into the firms, you have to perform excellently to save your Analyst slot.
We put down the approximate timeline of all Summer Analyst programs, Full Time Analyst programs in the “Recruiting process” so that you can plan ahead your career.
3.2 Recruiting Process
There are 2 types of recruiting processes: The on-cycle process and Off-cycle process. We layout the timeline of those two processes below, from networking to on-boarding period, for your reference.
HH = headhunters
Upon completing the SA 2020 internship recruitment process, qualified interns will receive full-time offers starting working in summer 2022.
Private Equity firms Analysts are recruited from 2 sources: (1) current interns who performed well in their summer internships and (2) fresh graduates who apply via Full-time Analyst program.
About the Summer Internship program for MBA students, this is the timeline for the 15-month or 18 month MBA program. For 1-year MBA programs, either the timeline is the same or recruitment happens in Jan-Feb and the internship starts in Jun – Jul same year.
We understand that the table contains a lot of information, which can be too overwhelming for any newcomers. Hence, here is an example of the Associate On-cycle recruitment from this timeline:
Headhunters start approaching IB Analysts around July – August 2020, then the whole interview process will run from August to October 2020 across firms. Successful candidates will receive the offer. However, those candidates only start their jobs around August – September 2022. This process will be replicated every year, meaning that if you got a PE Associate offer in 2021, you will start your job in 2023.
On-cycle Recruitment Process:
The on-cycle process mostly targets Analysts at Bulge Bracket and Elite Boutique Banks for Associate positions at Mega-funds and Upper Middle Market funds. However, as the industry keeps growing, PE firms now also organize on cycle recruitment for Summer Analyst Program (i.e: internship) and Full-time Analyst Program.
For Associate positions, the process can start as early as July to October, only a couple of months after Analysts at Bulge Bracket or Elite Boutique Banks start their jobs. If you finish the process and you get the job offer, you can only start in the next 1.5 – 2 years. For example, if you get the offer in 2021, you will only start your PE career in 2023.
The headhunters have more power on the Associate On-cycle recruitment process compared to Off-cycle. After getting your CVs, the headhunters will contact you and set up a telephone interview. Some common questions in this interview could be: “Walk me through your resume?”, “Why Private Equity?”, “Why this firm?”, etc. If you can impress the headhunter, they will pass your CV to the firms. Hence, headhunters decide whether you can go to the next round. You would better show up well prepared and win them in the telephone interview.
The PE firm will invite you to “a weekend event”, in which the most nightmare part of On-cycle recruitment happens. You will have four to five 30-minute interview sessions with people across levels in that firm. If you can pass, the firms will call you for an LBO model test. Finally, you will have the result on Monday.
We also list down common asked questions in a PE interview in section 5: Prepare for the interview. You can visit there to prepare yourself ahead.
For Interns and Analysts position: you can find the timeline in the “PE timeline table” above. However, always double check with your target firms because Interns and Analysts are not PE firms’ recruiting priority and the process can vary year by year.
Interview process is not as exhausting as that of Associate and interview questions skew towards fit questions more than deal experience and case studies.
Off-cycle Recruitment Process:
The Off-cycle process is applied for below situations:
- Middle Market funds recruiting Associate positions,
- Positions in non-US markets,
- Positions for non-experience in Investment Banks
Among those 3, Middle market firm recruitment is the most common case. Therefore, we will focus on the process of (1). The requirement, timeline and process of (2) and (3) will depend on which exact position the firm is recruiting
The process of recruiting will start after the On-cycle process, from December to February. Successful candidates in this track will start 1.5 – 2 years later, the same timeline as On-cycle successful candidates.
However, if you apply for any vacancy that firms need immediately, you can start instantly. Those recruitment timelines are more random throughout the year.
The off-cycle recruiting process usually lasts longer, in which recruiters want to assess your “fit” and critical thinking abilities on deeper levels and they also require more thought and preparation of a real investment thesis.
Headhunters have little power here but you can still try to reach out to them and check if there is any vacancy.
|Recruiters||Mega Funds and Upper Middle Market Funds||Mostly Lower Middle Market funds. Mega Funds and Upper Middle Market funds still can recruit if there are available slots|
|Target candidates||Analysts in Bulge Bracket and Elite Boutique Banks|
(1) Analysts at smaller firms/banks
(2) People who do not work in banks
(3) Roles not in the NYC
|When||The process will start in August or September||The process will start around December or January|
(1) Days to weeks
(2) Starts and ends very quickly
|Interview||A paper LBO or a two-three hour LBO is more common in On-cycle recruitment.||Focuses on the in-depth thought process; therefore, taking-home LBO model and presentation is often applied|
Private Equity is all about deals; therefore, before writing your resume, you should carefully consider which experience makes your resume deal-oriented. In the below table, we score all the relevant experiences so that you can have a direction for your resume.
|Score||Relevant work experience – For pre-MBA Associate|
|5||An analyst at Bulge Brackets or Elite Boutique Banks|
An analyst at Middle-Market & Boutique Banks
An analyst at a Middle-Market Private Equity firm
|3||An experienced candidate at Big4, Valuation firms, and Risk Management|
|2||An internship at Wealth Management or Boutique Financial service firms|
|1||Relevant finance experience including: student-run funds, finance and business clubs|
|Score||Relevant work experience – For Analyst|
An internship at PE.
An IBD internship at Bulge Brackets/Elite Boutique Banks
An internship at Hedge funds
An internship at Sales & Trading, Equity Research in Investment Banks
|3||An internship at Big4, Valuation firms, and Risk Management|
|2||An internship at Wealth Management or Boutique Financial service firms|
|1||Relevant finance experience including: student-run funds, finance and business clubs|
If you can score 4 or 5, it means that you have a preferred experience for Private Equity. But what if you only get 1-3? Definitely, there will be more work to do with your resume but we will share how to twist that.
- Step 1: Take a look at the current job description of Analyst/Associate/Senior Associate and pick the keyword when your target firm describes that position.
1. Both job description and actual work of PE’s Analyst and pre-MBA Associate are related to Investment Deal. Therefore, the key theme of the resume should be your Achievements/Involvement in Deal transactions, emphasizing on Due diligence, Financial Modeling or Market Valuation.
2. If you apply for Senior Associate positions, Deal experience is important but experience in managing companies, restructuring organizations, etc should be highlighted also because Senior Associates probably involve more in portfolio companies’ operation and management.
- Step 2: Select your achievements/involvements that you can read
There are some ground rules that you should follow here
- You should choose 2-4 achievements under each position. Do not put only 1 achievement as it will raise the concern that you did not achieve much. There is one exception here: IB Analysts who have just started their jobs in the last 2-3 months.
- Change any relevant word into “deal”, if possible. People who scored 1-3 in the table above often slip this rule but this principal can help them have a more PE-driven resume.
- In each achievement, remember to put the size of that deal, type of that deal, and your action/involvement.
- The order of deal size, deal type and your involvement should be consistent across bullet points. We often recommend this order [Your action/responsibility][Deal size][Dealtype]. Consistency will help the hiring team catch up all the information quickly.
- Start your point with an action verb to get the attention and clearly express what you did
Those rules will be beneficial also for anyone who owns a strongly related experience to private equity.
3.4 Prepare for the Interview
The interview process will include multiple rounds. Normally, Analysts and Associates will have 2-3 interview rounds; some firms even organize 4-5 interview rounds. Internship recruitment can be less heavy: only 1-2 interview rounds.
First interview round is to screen the candidate profile by asking some fit/behavioural questions, such as Why PE? Why this firm? etc. For Associate recruitment, it will be conducted by headhunters via phone. For Analyst and Intern, it will be conducted by the PE’s hiring team.
Other interview rounds will be conducted in-person and will skew towards technical questions, case study, deal experience, etc.
What do Recruiters Evaluate?
Private Equity firms will evaluate your skills, your technical knowledge, and why you are interested in PE and investment deals. Many questions are designed to test these competences. Simply put, interview questions will be belong to 6 main categories:
(1) Why private equity associates?
(2) Why the firm?
(3) Your achievements and failures?
(4) Your strengths and weaknesses?
Growth/profitability driver models (3)
Quick IRR math questions (4)
(1) Evaluate the growth of a deal
(2) Tell me about one of deal experience
What is the firm’s current portfolio? (1)
Tell me about the firm’s previous strategies and exits (2)
What do you know about the firm’s investment thesis? (3)
Which companies do you think are the best and the worst (4) in the portfolio?
If you had been able to do something different, what (5) would have you done?
(1) What are the major companies in this industry?
(2) Which top company will you invest in?
(3) What are the company’s growth drivers and risk factors?
(4) What is that company’s outlook in five/ten years
Solve cases involved in 3-statement models with a focus (1) on the revenue and expense drivers
A take-home LBO model and presentation (2)
A three-hour LBO modeling test (3)
A simple paper LBO (4)
How to Prepare and Ace an Interview
#1. For fit/behavior questions, this is the part where you tell your stories with interviewers. Thanks to these questions, recruiters will learn how your previous academic and work experience fits into the private equity and also strategies of the firm you apply for.
The questions in the first place always surround:
- Introduce a little bit about yourself / Walk me through your resume
- Some of your strengths, weaknesses
- Your achievements and failures
- Future plan and why Private Equity?
What you should prepare here are crafting your own stories (reflecting your achievements, past experience, transferable skills and leaderships), and backing up small personal stories to answer questions related to strengths and weaknesses.
If you have some disadvantages in your profile such as low GPA, non-target background, fewer outstanding accomplishments, fewer finance internships, and etc., you have to prepare stronger responses to make up for these “real weaknesses”.
#2. For technical questions, what you will be interviewed always sticks with accounting, finance, valuations, and practical deals.
- Accounting: Financial statements (types of financial statements, links between different types of financial statements), revenues, operating costs, EBITDA, debt & equity, etc.
- Finance: Equity Investments (stocks), Fixed Income Investments (government bonds, corporate bonds, commodities, currencies) , Derivative Investments (options, futures, forwards, swap), etc.
- Valuation: Valuation metrics and multiples (Discounted Cash Flow, LBO modelling, etc.), knowledge about mergers and acquisitions, etc.
#3. Other non- technical questions: Beyond technical comprehension, private equity firms also want to test your knowledge about the market, practical deals and companies. Your work is to keep abreast of news about markets, imminent IPO, bond issuances, and mergers & acquisitions on a daily basis. They can also ask your opinion about the firm’s portfolio and what you will do accordingly. The questions largely depend on your experience on your profile. That means if you present your active involvement in transactions/deals, you might get many questions about it. Discussing the deals is considered the most challenging part in an interview.
Private Equity is one of the most well-earned careers in the finance industry: even at analyst level, you can get a six-figure for your total compensation. If you move up the ladder in the industry, you can even get more income thanks to carried interest. However, to get into Private Equity, you have to prepare yourself by building up relevant experiences very early in your student life, by practicing technical knowledge and by keeping yourself updated about fund investment, M&A and other industry news.