Salary, bonus and, most importantly, the big bucks you can earn through carried interest are all part of the private equity industry’s appeal. In this article, we will provide the salaries range of private equity professionals in different positions and regions, the compensation structure, as well as comparison of private equity salary and other Wall Street career paths.
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.
1. Private Equity Salary: An Overview
On average, private equity analyst has a total compensation of around $120K. That of associate is from $170K to $270K, of principle is $850K, and of managing director is $1.6M. While you certainly will earn a lot of money if you’re in private equity, the salary range can differ based on regions or types of funds.
Generally, the US pays better than Europe & Asia Pacific, and megafunds also offer higher salaries due to larger management fees. Here’s a table of the average compensation versus the high compensation of private equity firms in North America:
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 the small sample size, Analysts are not included in the survey. Normally, an Analyst will receive a 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 assets 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
1.1. Private Equity Salary by Region
The salary ranges in the US, Europe, and the Asia Pacific are different. Across all regions, private equity firms in the US pay the most, usually 20% higher than in Europe. Due to the small size of deals, PE people in Asia typically get paid 40% lower compared to the US.
The US is the most ideal working place when it comes to Private Equity. Total remuneration averages are higher at every rank in the U.S. with just one exception. Managing directors (MD) and partners in Europe report earning nearly $2.4 million in total remuneration, well above the $2.0 million and $892k, respectively, in the U.S. and Asia Pacific regions. However, the sample size at the MD level is always smaller, making those numbers more prone to yearly swings.
Average total compensation by position in US, Europe and Asia Pacific private equity firms
1.2. Private Equity Salary by Fund Types
In private equity, salaries vary based on the asset under management of the fund. An associate at a megafund can earn up to $250K, compared with $214K at a middle market fund. It goes without saying that mega funds (funds with more than $5B AUM) will almost always offer the highest salaries, because they manage the largest amount of money.
Specifically, Apollo Global Management – frequently reputed to be the highest-paying firm on the street in terms of all-in compensation, pays their associates upwards of $400k per year.
Middle Market Funds
Average total compensation by position in middle-market funds and megafunds private
Note: Due to small sample size, analysts are not included in the survey. Normally, an analyst will receive a total package from $100K – $150K per annum.
2. Private Equity Salary Sources
There are three main sources of income for private equity firms: management fee, deal fee and investment returns.
- For many decades, the fee has been around 2% of the total funds raised. 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.
- There are other fees beyond the management fees, such as deal fees. In the mega-funds (funds that manage more than $5B 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.
3. Private Equity Compensation Structure
Private equity compensation consists of 2 parts: (1) base salary and (2) bonus. The base salary is covered by the management fees and the deal fee as introduced above. The bonus, on the other hand, comes from the investment return, which includes 2 main components: co-investment and carried interests.
- Co-Investment: 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 Interests: 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.
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 the following 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 a $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 was $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, 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.
5. Private Equity Salary vs. Other Wall Street Jobs
Private equity salary may be slightly lower than hedge fund, but is quite higher compared to investment banking at senior levels. This is because investment banking, irrespective of a good or bad year, remains largely the same as the client base remains the same. However, compensation on the buy side is more variable depending on fund performance. PE and HF people can make substantially more than investment banking if the fund does well.
5.1. Private Equity vs Investment Banking Salary
Most private equity firms pay their analysts around 30% lower salaries than investment banks pay due to the nature of work and the mechanics of private equity’s compensation. An investment banking analyst typically gets paid a total compensation of $150K to $200K a year, while a private equity analyst might receive an average of $100K to $150K.
You can expect more if you work at mega-funds in New York where an analyst can be paid up to $200K a year. Here’s a table that compares the salaries of private equity people and investment bankers at each level, for reference purposes only (the average case):
|Positions||Total Compensation (salary & bonus)|
|Private Equity||Investment Banking|
|Analyst||$100K – $150K||$150K – $200K|
|Associate/ Senior Associate||$150K – $400K||$250K – $400K|
|Vice President||$500K – $800K||$500K – $700K|
|Principal||$700K – $2,000K||$500K – $1,000K|
|Managing Director/Partner||$2,000K +||$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.
5.2. Private Equity vs Hedge Fund Salary
Overall, hedge fund compensation is higher, but also more variable than that of private equity. At the first level, the difference in salaries of both HF and PE is not significant. However, moving up the career ladder, a HF analyst earns up to $600K, compared with $400K that a PE associate can make (HF analyst ~ PE associate in the career ladder).
At the top levels, a hedge fund portfolio manager who has a great year could easily earn more than a managing director in private equity – depending on the fund size and structure. Here’s the table to sum everything up:
|Hedge Fund||Private Equity|
|Position||Total Compensation||Position||Total Compensation|
|Junior Analyst/ Research Associate||$100K – $150K||Analyst||$100K – $150K|
|Analyst||$200K – $600K||Associate/ |
|$150K – $400K|
|Senior Analyst/ Sector Head||$500K – $1,000K||Vice President/ Principle||$500K – $2,000K|
|Portfolio Manager||$500K – $3,000K||Managing Director||$2000K +|
Hedge fund and private equity total compensation by position
Private Equity is one of the most well-earned careers in the finance industry: even
at analyst level, you can get a six-figure 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.