Private Equity Trends and Compensation
The private equity market is doing very well based on 2018 deal activity. There were more than 4,800 deals closed, which is a record number. And the total value of the deals is estimated at more than $700 billion, which is the second-highest level on record. While fundraising was down, a number of indicators highlight solid industry growth and private equity compensation in the coming years.
Every year, Heidrick & Struggles releases their North Amercian Private Equity Operating Professional Compensation Survey. While fundraising is down compared to the two years prior, typically a key piece of compensation, the news is not necessarily bad. Rather, 2018 appears to be a year where firms put the money they raised previously to work. The industry is still showing strong results as noted above with the record number of deals closed and total deal value, second only to 2007.
The report sees the following as indicators for industry and compensation growth:
- The Federal Reserve has suspended its program of raising interest rates and has cut rates in 2019 and potentially to do so again in 2020. If the Fed merely maintains existing rates, doing so will keep credit cheap and flowing to big borrowers such as PE firms.
- Forty-three percent of respondents to a survey of institutional investors said that they expected to increase the number of their general partner (GP) relationships in the next five years. This implies a built-in source of demand for PE firms irrespective of any other factors.
- Investors are using fund assets to buy stakes in GPs and other asset managers rather than commit capital to the GPs’ funds. While still in an early stage, this approach is gaining in popularity such that the number of these deals more than doubled in 2018, to 25 from 11 in 2017.
- The secondary market for fund stakes is booming as GPs get increasingly creative in structuring their secondary transactions. As is the case with buying GP stakes, the secondaries trend should raise demand for specialized professionals who can excel in this emerging marketplace—and raise their compensation as well.
The report delves into compensation by seniority, base and bonus, funding of cash compensation, and non-cash compensation. It also highlights the need for GPs to address operational issues that reduce costs and improve efficiencies. Those that can will be in high demand and see the associated compensation boost. Additionally, as the industry grows, differentiation will become a key factor and one way to exploit it will be through a niche focus. Again, developing a name for yourself in a specific area will help increase your compensation.
In looking at hiring trends, operating partner is the fastest growing role in the industry. Both GPs and limited partners (LP) see the need for operations specialists. The trend makes sense when you consider the majority of the value derived from portfolio companies is through owning them and not just exiting them profitably. And when you’re busy looking for new deals, you’re not always focused on the performance of your existing portfolio companies.
Interestingly, nearly 90% of partner hires are not connected to the firm they join. This demonstrates the growth the industry is experiencing. Candidates for these roles tend to have operational experience with P&L responsibility, consulting experience, and or familiarity with private equity.
With the amount of movement at the partner level, experienced firms know what they are looking for and are making fewer hiring mistakes. Two tactics successful firms are focusing on are alignment of pay between deal makers and operations executives, and seeking input early from existing operating partners.
If you’re considering hiring an operations partner or related role, send us a note. Working with our executive recruiters who know and understand Private Equity, we’ll help you suss out specifically the traits and skills you need for your firm. Our experience working on PE hires provides you with the latest knowledge and best practices.