Venture Capitalists' Lose a Chunk Of Their Earnings as Returns Shrink
By KOPIN TAN
DOW JONES NEWSWIRES
November 20, 2002
The good news for private-equity professionals is that base salaries grew across the board in 2002.
But here's the rub: Professionals at venture-capital and leveraged-buyout firms felt the pinch since their share of profits from deals, which often accounts for the biggest chunk of what they make each year, fell sharply as returns shrank.
For top dogs like managing general partners, overall compensation -- including base salary, annual bonus, and "carried interest," or a share of deal profits -- fell 70% from $6 million in 2001 to about $1.85 million, according to the annual survey of private equity compensation by Mercer Human Resources Consulting Inc.
Midlevel partners or senior vice presidents typically saw their overall compensation decline about 40% from about $965,000 to $576,600, according to the survey of 84 private-equity firms covering some 1,066 professionals.
"Overall, it was a difficult year in terms of compensation, especially for people at the partner level or above, since they were impacted by the fact that carried-interest distributions were lower than in previous years," said Stephen Brown, a principal at Mercer who oversaw the survey.
The dismal carried-interest distributions suffered in large part due to the lackluster markets for both initial public offerings, as well as mergers and sales -- the traditional destinations where private-equity firms cash out of their portfolio companies.
That being the case, the more senior partners bore the greater brunt of that impact since they collected the biggest profit shares in boom times. By contrast, a junior partner or vice president actually saw overall compensation this year edge up 1.8% to about $299,000, while a senior associate took home about $172,000 in 2002, up 5.3% from 2001, the survey says.
The annual Mercer survey asked participants about their pay situation as of March this year. It covered professionals in 11 positions from managing general partner to analyst, and also includes some posts like controller and administrative manager. The 84 firms that responded included 62% that were privately held and 38% that were institutional, or part of larger organizations such as banks, insurance companies or corporations.
But if the compensation picture looks bleak and gray, especially when compared with recent bumper years, those who looked hard enough still found a silver lining or two.
The 2002 survey found that base salaries for all 11 positions had increased this year, no mean feat given the climate of layoffs and pay freezes on Wall Street. For instance, a senior partner saw his basic salary edge up 2.6% to $446,300, a junior partner's increased 14% to $185,900 while an associate's rose 6.9% to $91,400.
The total cash compensation -- or base salary plus annual bonus -- also increased in nine of the 11 positions surveyed. "We think what is happening is firms are trying to give cash-compensation rewards to their top performers and letting go of their less promising ones," Mr. Brown says. "That way they can focus on providing meaningful compensation and, on average, there is still growth in cash compensation."
Mr. Brown pointed out that about 15% of the firms in the survey reported "head-count reductions" this year -- a percentage that is more significant since most private-equity firms aren't very large to begin with. These firms on average had about 21 on their rosters: six at the partner level or its equivalent, eight other investment professionals and seven members of support staff.
Interestingly enough, the survey found that while managing general partners' base salary squeaked up just 0.2% to $472,400 as of March, they made up for that meager raise by giving themselves fatter bonuses. Managing general partners saw their salary plus bonus jump 17% in 2002 -- the largest of all 11 positions in the survey -- rising from $1.03 million in the 2001 study to $1.21 million this year.
To most private-equity professionals, the results of the eagerly anticipated annual survey came as little surprise, since most had seen how returns have shriveled in the past two years while the investment climate remains tentative and challenging.
Meanwhile, while the dollars earned in their profit-sharing programs have declined, most firms have yet to cut their share of profits or carried interest to placate investors, in part because private-equity deals have longer-term horizons typically of five years or more.
For now, a 20% carried-interest split -- this means the private-equity firm will receive 20% of the profit, while the investors who commit the capital that fund deals get 80% -- remains the industry norm, according to a 2002 compensation study released earlier this fall by Private Equity Analyst, an industry publication, and Michael Holt, an independent compensation expert.
In fact, venture capital firms often get a higher carried-interest split than 20%. According to the study, which surveyed 147 U.S. firms and 35 international ones, nearly a third of the independent venture firms have carried interests other than 20%.
Nearly 16% of those in that sample had carried interest splits of 25% while 3.2% have profit shares as high as 30%, according to the survey. Also, nearly 5% of the independent venture firms in the sample have performance-based carried interests, or profit shares that vary according to the returns delivered to their investors.
Write to Kopin Tan at kopin.tan@dowjones.com |
