Follow-on investment salary is an important consideration for finance professionals looking to transition from investment banking to private equity. The compensation structure in PE is more complex than in IB, with base salaries accounting for a smaller portion of total comp. Carried interest and bonus potential make up larger portions of comp for more senior roles. Factors like firm size, fund performance, and deal flow impact bonus payouts and carry vesting. Though base salaries are lower than banking, carry and bonus in good years can lead to higher total compensation long-term for those who advance to senior investment roles.
Base salaries account for a smaller portion of compensation in follow-on investments
In investment banking, base salaries account for around 50% of total compensation for junior roles like Analysts. Bonuses make up the other half in a normal year. In follow-on investing, base salaries are often lower than banking, accounting for maybe only 30-40% of total comp. This is because other elements like carry and bonuses make up larger portions in a good year. For example, a follow-on investment Associate may earn a $150K base salary, much lower than the $150-200K base salaries for banking Analysts. However, bonuses and carry can boost total comp much higher in good years.
Carried interest is a key factor for more senior roles in follow-on investments
Carried interest, or carry, represents a share of profits from successful investments for the PE firm’s investment team. It becomes a key element of compensation for senior roles like Principal and Partner. Carry is earned on investment returns above a hurdle rate like 8% IRR. Firms may take 20% of returns above the hurdle rate, with around 75% of that carry going to the deal team members. So in a year with a high return multiple, carry can make up the largest portion of comp, especially at the senior levels. But carry also comes with more risk, as it requires holding investments for years and hitting return targets to vest.
Bonus payouts in follow-on investments depend on firm performance
Bonuses in follow-on investing depend much more on overall fund performance compared to banking bonuses. In a year when the fund’s investments are doing very well, bonus payouts to the investment team will be higher. When the market is down and returns are weaker, bonuses will be reduced. The size of the firm also matters – larger firms like KKR have more bonus pool money available coming from their substantial management fees. Smaller firms with fewer assets under management will have lower bonus pools to draw from. So bonuses in follow-on investments tend to vary much more year-to-year.
Higher deal flow can increase bonuses in follow-on investments
Another factor influencing bonuses is the level of deal flow a firm completes in a given year. All else being equal, a year in which a PE firm does 10 new acquisitions and exits 5 investments will likely have higher bonuses than a slower year with only 2 acquisitions and 1 exit. More deals generate more transaction and monitoring fees, as well as eventual carry. So investment team members at firms with hot deal flow may see bonuses pushed higher in compensation negotiations.
Though base salaries are more moderate, carry and bonus potential make follow-on investing lucrative for those who advance. But compensation also comes with more variability and uncertainty tied to fund performance and markets.