Welcome to our 2021 North American Private Equity Investment Professional Compensation Survey. Together with our survey of private equity operating professionals (coming later this year), this report provides a comprehensive picture of the compensation that North American private equity executives are currently receiving.
For this report, Heidrick & Struggles compiled compensation data from a survey of 1011 investment professionals in North America. This year we added to the range of topics on compensation and executives’ backgrounds we explore and look at compensation for women and people of color. (For more on the methodology of this report, see “Methodology” on page 5 of the full report.)
We hope you enjoy reading the survey, which remains the only one of its kind. As always, suggestions are welcome, so please feel free to contact us—or your Heidrick & Struggles representative—with questions and comments.
Executive summary
This year’s survey includes a review of 2020 and year-to-date 2021 activity in North American private equity (PE), our thoughts on the major hiring trends for investment professionals, and an exploration of the composition of 2020 compensation packages for investment professionals, including analysis by gender and ethnicity.
Private equity: The big picture (page 7 of the full report)
- After being upended by the COVID-19 pandemic, the US private equity market finished 2020 strong. Deals and total value were off their 2019 levels, but above their 2018 levels.
- Exit activity dipped and then rebounded, although exit timeframes were extended.
- Fundraising slipped because of the pandemic, but the impact was lessened by the fact that PE had begun 2020 with very high levels of dry powder: at the end of Q1 2020, there was more than $550 billion that was less than two years old.
- There are multiple signs that PE activity is returning to growth in 2021. GPs are sensing opportunity in retail and hospitality, there were some large carve-outs and take-private transactions announced in Q1, and Q1 exit activity was robust.
Investment professionals: Hiring trends (page 7 of the full report)
- After a COVID-19 slowdown, hiring returned to its 2019 levels by the end of 2020, and momentum is continuing in 2021.
- The shift to remote work has opened opportunities in new locations.
While there continues to be demand for managing directors and partners, the hiring focus has shifted to vice presidents and principals, likely to fill out teams after an earlier surge in more senior hires. - Demand for operating partners has also been very active.
- Firms must move quickly with the right offer or lose out, particularly with diverse candidates.
Investment professionals: Compensation trends (page 12 of the full report)
- Despite many people working in remote, low-tax locations, compensation has not decreased: slightly more than half of all respondents (56.7%) reported an increase in base last year, and 54% expect an increase this year; with most (76%) seeing increases of 20% or less.
- Bonuses remained strong, although fewer respondents reported an increase last year: 67% saw an increase in 2020, down from 77% for 2019.
- Growing demand for female and diverse candidates could be a pathway toward pay equity.
Carried interest provisions (page 37 of the full report)
- Almost all investment professionals at more senior levels reported receiving carry, but it remains uncommon at the associate/senior associate level.
- When carry vests on a fund basis, it takes an average of six years to fully vest. When carry vests on a deal-by-deal basis, it takes an average of four years.
Co-investment eligibility and rights (page 39 of the full report)
- As in past years, almost all investment professionals have co-investment eligibility. Co-investment was fund-based for 56% or more of respondents at each level in 2020, about the same as 2019.
- A smaller percentage, generally 10% to 16% for senior-level professionals, is deal-based. The percentage of deal-based co-investment eligibility is highest (40%) among associates/senior associates.
State of the private equity market
After a promising start to 2020, the early months of the COVID-19 pandemic upended the global economy and PE deal making along with it. Yet, by the end of the year, sponsors were actively putting capital to work again in minority transactions, public companies, and add-on acquisitions—often in the healthcare and technology sectors that were the focus of so much other attention because of the pandemic. Growth equity reached the highest deal value on record.
When the dust settled, Pitchbook counted 5,309 deals closed for a combined value of $708.4 billion, both off their 2019 levels.1 This was the first decline in both deal-making value and count since 2009, but both remained above the 2017 level. Exit activity dipped and then rebounded, although exit timeframes were extended. Fundraising also slipped because of the pandemic, but the impact was lessened by the fact that PE had begun 2020 with very high levels of dry powder: at the end of Q1 2020, there was more than $550 billion that was less than two years old.
There are multiple signs that PE activity is returning to growth in 2021:
- GPs are sensing opportunity in retail and hospitality.
- There were some large carve-outs and take-private transactions announced in Q1.
- Several PE firms have launched a special purpose acquisition company (SPAC).
- PE firms have pursued private investment in public equity (PIPE) deals.
- Q1 exit activity has been robust.
- Hiring has also been robust.
Hiring trends
Despite fears of a very slow market because of COVID-19, hiring returned to its 2019 levels by the end of 2020 and momentum is continuing in 2021.
Private equity firms have been adding staff at all levels, but we did observe a shift in 2020: while there was substantial hiring for investment partners and managing directors two years ago, the focus shifted to vice presidents and principals. Demand for operating partners has also been very active and it is not improbable that, at some point, the numbers of operating partners will be equal to those of investment professionals.
Firms seeking to hire leading candidates must move quickly on their prospects with the right offer or risk losing them to competitors. Top candidates consistently have at least two other offers in front of them, and sometimes more—and the competition is even fiercer for diverse candidates.
The shift to remote work during the pandemic resulted in many PE professionals working away from traditional East or West Coast locations, and that shift is affecting hiring. Many professionals want to move permanently to locations with lower taxes, particularly the Southeast and Southwest, and some firms are opening offices in those areas, which is also creating opportunities for professionals who had been living and working outside major PE hubs and did not want to relocate.
Compensation trends
While some industries have reduced the compensation of people who have chosen to work remotely from lower-tax areas, that has not been the case in PE: compensation remained strong during the pandemic. Slightly more than half of all respondents to this year’s survey (56.7%) reported an increase in base in 2020 from 2019, and 54% expect an increase in 2021. (See chart, “General observations on compensation trends,” on page 8 of the full report.)
Bonuses remained strong, although slightly fewer respondents reported an increase in their bonus: 67% saw an increase in 2020, down from 77% for 2019. Most 2020 bonuses increased between 11% and 50%. A majority of bonuses are to some extent discretionary, and 55% are entirely discretionary. Of those that are formulaic, individual performance is a bigger determinant than fund/team performance or firm performance. Most bonuses are paid in January (20.8%) or December (42.9%). (See chartsBonus plan” and “Mean total cash compensation by AUM” on pages 9 and 10 of the full report.)
This year’s survey also looked at average total compensation by gender and ethnicity. For the most part, this survey does not show one group being favored over another. The exception, however, seems to be how female managing directors and partners are being paid compared to their male counterparts. Our feeling is that this is more of a reflection of the fact that there are relatively few females at senior levels at PE firms. That pulls the average down.
Over time, this discrepancy should narrow as more female investment professionals are actively recruited into private equity, albeit at the junior ranks. (See chart, “Average total compensation by gender and ethnicity,” on page 11 of the full report.)
Non-cash compensation
Carried interest provisions
Typically, investment professionals are required to contribute capital if they receive carry. However, only 71% of managing partners reported that they made contributions of capital in this year’s survey, down from 75% last year. Conversely, 23% of associates/senior associates made such contributions, up from 20% last year. There were also some small shifts in the middle levels. Among PE investment professionals, vesting for carried interest is typically based on a straight-line schedule rather than a cliff-vesting schedule. (See charts “Vesting basis,” “Basis of carried interest,” “Contributions to carry,” “Vesting of carry,” “Time to vest, on fund basis,” and “Time to vest, on deal-by-deal basis” on pages 37 and 38 of the full report.)
The percentage of investment professionals whose carry is subject to clawback provisions in a bad leaver situation generally increases with seniority, and 42% of managing partners faced such provisions last year, down from the prior year. However, more than half of respondents at the principal, partner/managing director, and managing partner levels had their carry subject to holdback as reserve for potential fund underperformance, up to 73% at the managing partner level. (See chart “Clawbacks and holdbacks” on page 38 of the full report.
Co-investment
Many firms also offer their investment professionals an option to co-invest, and some provide their investment professionals with loans to do so. The figures for those provided leverage are roughly the same this year as last year, except for a notable rise in the share of vice presidents who said they received leverage, from 52% to 59%. (See chart, “Co-investment eligibility and rights,” on page 39 of the full report.)
Comparisons of compensation by region, education, and experience
Comparison of compensation across US regions
As we have noted, the COVID-19 pandemic compelled PE professionals to work remotely in 2020 and many have shifted permanently to lower-tax locations. Perhaps because of this, the picture of compensation across US regions looked far different in 2020 than it did in 2019.
While it has been typical for total cash compensation for investment professionals in the Northeast to surpass those in other regions at all levels, last year managing partners in the Midwest and West Coast outperformed their Northeast peers. Likewise, partners/managing directors in the Southeast and on the West Coast did better than those in the Northeast. The latter region did outperform in other categories, with the exception of associate/senior associate, where it tied with the West Coast. (See chart, “Comparison of compensation across US regions,” on page 40 of the full report.)
Comparison of compensation by education
As in prior years, we see few differences in compensation between junior staff with and without MBAs. (See chart, “Total cash compensation by education level,” on page 41 of the full report.)
Comparison of years of private equity experience and compensation
(See chart, “Years of private equity experience by level of seniority,” on page 42 of the full report.)
About the authors
Jonathan Goldstein (jgoldstein@heidrick.com) is the regional managing partner of Heidrick & Struggles’ Private Equity Practice for the Americas; he is based in the New York office.
John Rubinetti (jrubinetti@heidrick.com) is a principal in the New York office and a member of the Private Equity Practice.
Acknowledgments
The authors wish to thank Mohd Arsalan and Daria Sklyarova for their contributions to this report.
Reference
12020 Annual US PE Breakdown, Pitchbook, January 11, 2021, pitchbook.com.
