What is the Salary in Private Equity?
The Private Equity Salary is a major consideration for candidates, namely investment bankers, considering an exit to the buy side. In the following private equity compensation report, we’ll provide the most up-to-date salary data as of 2023 pertaining to the earnings of private equity investment professionals starting from the associate level, including comparisons to the salaries received in the investment banking industry.
Private Equity Salary Guide (2023 Update)
The private equity associate is most often the lowest-ranking position at a private equity firm, albeit certain PE firms hire analysts.
The majority of private equity associates are former investment bankers who completed a one or two-year stint at a bulge bracket or elite boutique bank or come from a management consulting background at one of the Big 3 firms (MBB).
At the associate level, the compensation structure – much like investment banking – is composed of two parts:
- Base Salary → The base salary is the fixed component of the compensation received, i.e. the minimum guaranteed salary, assuming the individual is not laid off.
- Bonus → The bonus, on the other hand, is the performance-based component of the compensation structure, with the amount contingent on factors such as individual performance, fund performance, and near-term market outlook.
For the vast majority of first-year private equity associates, the base salary is around $135k to $155k. Then, based on fund performance, bonuses tend to range from 100% to 150% of the base salary.
The “all-in” combined salary is approximately $275k to $390k at top PE firms, but this figure can be much lower for smaller-sized funds and exceed $400k for firms with reputations for being the highest-paying (e.g. Apollo Global).
The higher up the firm’s hierarchy you go, the more that the transparency around compensation starts to wane. Hence, our decision to deliberately exclude compensation data on principals and managing directors (MDs).
What is the Average Salary in Private Equity?
The chart below summarizes the average salary ranges for private equity investment professionals in 2023.
|Private Equity Salary Data (2023)|
|Position Title||Base Salary||Bonus||Total Compensation|
|1st Year Associate||
|2nd Year Associate||
|3rd Year Associate||
|Vice President (VP)||
1. The income attributable to the receipt of carried interest (“carry”) is not included here.
The source for our compensation data is a vice president (VP) currently employed at a global alternative investment management firm – i.e. a “mega-fund” – so please note that lower middle-market and middle-market firms will most likely offer salaries on the lower end of the ranges.
Does Private Equity or Investment Banking Pay More?
Since most private equity associates come with one to two years of investment banking experience, clearly most private equity firms must pay above the average salary in investment banking to offer an incentive.
Besides the marginally reduced hours and being able to work on the buy-side – i.e. an investment role rather than advisory – the higher compensation is one reason that many decide to exit to the buy-side and join a private equity firm.
However, there is one notable exception: Centerview Partners, an elite boutique highly regarded for paying its analysts salaries competitive with buy-side opportunities – hence, its industry-leading retention rate.
Given the recent widespread increases in pay for investment banking analysts in 2022, private equity compensation was expected to soon follow suit, which turned out to be right.
However, the mounting dry powder, rising interest rate environment, and the increase in bankruptcies in 2023 are factors contributing to widespread concerns about fewer hirings in the industry.
Therefore, it would be reasonable to expect a slowdown in hiring in the near term, particularly due to the sheer amount of hiring that firms have done across the past couple of years, along with the macro issues and the increased cost of debt.
Carried Interest in Private Equity Salaries (“Carry”)
Carried interest, often referred to as “carry”, is the share of profits that flows to the general partners (GPs) of a private equity firm.
The carried interest component functions as performance-contingent compensation, as it is deliberately intended to incentivize the firm to perform well and generate strong returns.
Unlike management fees, carried interest is typically only paid if the fund’s returns meet a certain minimum threshold.
The standard fee structure in the private equity industry is the “2 and 20” arrangement, which comprises a 2% management fee and a 20% performance fee.
The actual payout can become rather complicated, however, because of factors like the catch-up clause and clawback provision.
The carried interest arrangement is specific to the private equity firm, but in general, members of the investment team should not expect to receive any proceeds until at the very least reaching the senior associate level, which is still uncommon.
Starting at the vice president (VP) level, one can expect to receive some carry, with the amount increasing for senior-level members like managing directors (MDs), as expected.
- Associate → No Carry
- Senior Associate → Uncommon
- Vice Presidents (VP) → Moderate
- Managing Directors (MD) + Partners → Significant
For mega-funds and larger-sized private equity firms with $1+ billion in assets under management (AUM), receiving carry at the lower levels (e.g. associate) is practically unheard of.
What Factors Determine Compensation in the Private Equity Industry?
Curious about the fund structure dynamics inherent to the private equity industry and the core factors that influence the earnings collected per fund?
The following video by Ben Chon – a former investment banker at JPMorgan and the founder of rareliquid – provides a comprehensive overview of the underlying concepts pertinent to grasp the compensation structure in the private equity industry:
- LBO Value Creation Strategies → Use of Leverage to Finance LBO Acquisitions to Amplify Returns
- Private Equity Compensation Components → Base Salary, Annual Bonus, Carry, and Co-Invest Option
- Standard GP/LP Fee Arrangement → “2 and 20” Fee Structure, i.e. Mechanics of the 2% Management Fee + 20% Performance Fee
- Determinants of Fund Returns → Illustrative Examples to Demonstrate the Impact of Fund Size (AUM) and Fund Performance on Internal Rate of Return (IRR)
Private Equity Compensation: Industry Trends and Outlook in 2023
In the next section, we’ll start by discussing the rising trend of private equity firms recruiting candidates straight out of an undergraduate program.
So, one key factor to consider in the private equity industry’s compensation is the responsibilities of the associate, as not all “associate” positions are the same.
- Sourcing → If the private equity associate’s role is mostly sourcing-related (i.e. reaching out to potential prospects via email and cold calling), the salary tends to be lower and relatively close to the pay in investment banking.
- Diligence → In contrast, if the associate’s responsibilities pertain mostly to performing investment diligence, the salary can be expected to be on the higher end (and exceed most investment banks).
Obtaining an MBA is often a requirement to get promoted for most private equity analysts, so joining a PE firm post-graduation does not come without drawbacks, i.e. not a real “shortcut” into the buy-side.
On a similar note, non-traditional candidates coming from a unique background – such as consulting in a highly technical, niche field – can expect higher compensation.
Usually, such candidates will require an MBA to break into the private equity industry, but their technical expertise and network in a specific niche – rather than modeling skills and deal experience – is what causes their candidacy to stand out to a firm.
For instance, a former consultant who specializes in environmental sciences and truly understands the technical side of the products (and systems) could be a valuable addition to the investment team of an industrial technology private equity firm.
Still, the traditional one or two-year stint in investment banking and the subsequent exit into the private equity industry remains the far most common pathway.
How are Private Equity Salaries Different by Location?
In conclusion, one influential factor that impacts salaries in private equity is the location of the firm.
At the risk of stating the obvious, U.S. private equity firms with offices located in the “financial hubs” tend to pay a sizeable premium to their employees.
The most notable financial hubs in the U.S. are as follows.
- New York City (NYC)
- San Francisco
- Los Angeles (LA)
Other cities with either a strong presence or an optimistic outlook in the coming years are the following: