Private equity compensation, especially co-investment salary, is more complex to analyze compared to investment banking. The key factors influencing private equity co-investment salary include management fees, deal fees, investment returns, carried interest policies, individual and fund performance. With over $4 trillion in assets under management globally, private equity firms manage capital from limited partners like pension funds and charge fees to cover high salaries. As a lucrative career, both cash compensation and carried interest should be evaluated when considering positions in private equity firms.
Base salaries partially funded by management fees
Private equity firms charge management fees, usually 1.5-2% of committed capital, to limited partners. These fees help fund operating costs and base salaries for employees before new investments occur. For a $1 billion fund, management fees could reach $20 million per year. Combined with deal fees charged to portfolio companies, these recurring fees provide stable cash flow to support compensation.
Bonuses linked to performance and profits
In addition to base salaries, private equity professionals receive discretionary bonuses based on individual, team and fund performance. While junior staff may receive 50% base and 50% bonus, senior leaders depend far more on bonuses over base pay. The split incentivizes delivering strong returns to limited partners. Most bonuses are paid from management fees and deal fees, but a percentage comes from investment profits.
Carried interest awards senior leadership
The most lucrative component of private equity compensation is carried interest – a share of net investment gains. Standard terms award 20% profits to the general partner after limited partners receive their hurdle rate, often 8% preferred return. Carried interest is commonly reserved for vice presidents, principals and senior leaders. Vesting schedules also apply to prevent windfall payouts to short-tenured employees.
Co-investments open to wider talent pool
Unlike carried interest, co-investments allow both senior and junior team members to invest personal capital into fund deals. By giving professionals ‘skin in the game,’ co-investments incentivize picking successful investments and supporting their growth. The policy aims to boost motivation and retention among high-potential middle-tier contributors who lack access to carried interest.
In summary, private equity compensation allows firms to attract top deal and investment talent. Management fees enable consistently high base pay, while performance drives bonuses. Long-term upside through carried interest and co-investment share profits with both senior leadership and emerging talent.