Private Equity Salary Guide: An Overview of PE Compensation (2024)

What is Private Equity?

Private equity (PE) is a common career progression for investment bankers. Analysts in investment banking often dream of moving over to a role in private equity. Because private equity firms employ top performers, these firms typically pay top-dollar salaries and generous performance bonuses, which can be well above investment banking compensation.

In addition to compensation, private equity is also alluring due to its high prestige in the finance world. Additionally, private equity can be rewarding as professionals will be able to analyze potential transactions and work with portfolio companies, helping these companies achieve their financial goals.

This guide will walk you through private equity compensation at different levels. Please note that this guide is focused on buyout equity roles, as opposed to venture capital (VC) or growth equity. Private equity firms that focus on buyouts will usually pay higher salaries since the PE firm will target more mature and predictable companies. This is in contrast to VC or growth equity, where the target company is still in the early stages and may not end up with a feasible product or business.

Private Equity Salary Guide

How Do Private Equity Firms Make Money?

Private equity firms pool money from investors, usually in the form of limited partners (LPs) and invest that money in companies. PE firms will structure themselves as general partners and will manage the PE fund on behalf of the limited partners. PE investors are high-net-worth individuals and institutional investors like pension funds.

Private equity firms will invest in private companies or in public companies that are taken private through acquisition by the PE firm. Once these companies are acquired by the private equity fund, they are known as portfolio companies. PE firms usually use a lot of debt funding to acquire companies; these are known as leveraged buyouts (LBOs).

As the general partners (GPs), the private equity firm will usually charge investors based on a “2 and 20” compensation structure. The 2 and 20 is a compensation structure consisting of a two percent management fee and a 20% performance fee. The management fee is applied to the total assets under management and is not dependent on the future profitability of the investments. The 20% performance fee is charged on the profits that the PE fund generates, above a specified minimum threshold known as a preferred return.

The two percent management fee is designed to cover base salary and bonuses, as well as various overhead costs like software and rent. The two percent management fee might be applied to total assets under management (AUM) or might only be based on the actual invested capital.

For example, a PE fund raises $1 billion. A two percent management fee of $1 billion is $20 million per year available for salaries and overhead.

Some PE firms may also charge the portfolio company transaction fees and/or monitoring fees. Since these fees are charged to the portfolio company instead of investors, LPs don’t generally object to this since it doesn’t come out of an LPs pocket.

Transaction fees are one-time in nature related to the actual acquisition of the portfolio company. These are typically around one percent of the total deal value.

Monitoring fees are designed to compensate the PE firm for ongoing advisory and management services on behalf of the portfolio company. These can vary quite a bit depending on the size of the portfolio company.

Finally, the PE firm makes money when it exits its investments. Assuming the exit proceeds are above a certain threshold (the return of investor capital and the preferred return), the PE firm will be entitled to 20% of the proceeds.

Typical PE Titles

Typical PE roles by title are as follows, sorted by entry level up to the most senior.

Analysts may be hired at some of the larger PE firms like KKR and are usually hired direct from obtaining an undergraduate degree. In this instance, analysts will be the most junior PE professionals. After working at the firm for a few years, analysts may move up to associate or pursue a graduate degree like an MBA.

Associates are normally the most junior professionals working at private equity firms. Associates usually enter private equity after spending a couple of years working in investment banking, or, occasionally, a top management consulting firm.

Vice president (VP) is the next level above associate. VPs usually have several years of experience in private equity and help lead deal teams through a prospective transaction. It’s at this level that a PE professional may begin to receive some compensation in the form of carried interest, which is discussed in more detail below.

Directors (or potentially Principals) are just above vice presidents. Directors are less focused on deal execution and more on generating deals, as well as negotiating key aspects of potential transactions.

Managing directors (MD) or Partners are basically the “top dog” at PE firms. MDs are rarely focused on modeling or other deal mechanics and are responsible for making sure the firm is investing in profitable transactions that meet (or obviously exceed) the PE firm’s hurdle rate.

Total Compensation

In order to attract and retain talented professionals, usually from investment banking, PE compensation is extremely lucrative. Regardless of level, private equity compensation is composed of at least two parts: a base salary and a bonus.

As discussed earlier, working in private equity can be quite lucrative, with salaries that typically exceed investment banking. Below is a representative sample of base salaries at each level. Please note that the below compensation levels are for US-based professionals at large PE firms. Pay in Europe and Asia is typically lower.

Total annual compensation for analysts is in the neighborhood of $100,000 to $150,000. The base salary component is around $100,000, with the bonus making up the rest. At this level, there is likely no compensation in the form of carried interest.

Depending on the level and experience, total compensation for associates can range from $250,000 to $400,000. The base salary would be $150,000 to $200,000, and the bonus as a percentage of the base salary will be higher than an analyst, likely in the neighborhood of 100% of the base. Similar to an analyst, there is probably no carried interest compensation.

As PE professionals move up, the pay increases substantially. Vice presidents at large PE firms can expect to earn a total compensation of $500,000 to potentially $1,000,000. At higher levels, the base salary doesn’t grow as much but the bonus becomes a greater percentage of the base. Additionally, carried interest begins to play a larger role in total compensation. Because of this, mid- to senior-level PE professionals earn mid-six figures and even into the millions.

What is Carried Interest?

At higher levels in a PE firm, carried interest becomes a critical component of total compensation. Carried interest represents a share of the profits generated by the private equity fund, which can result in enormous payouts if the fund performs well. For senior professionals, carried interest can make up the bulk of total compensation, potentially dwarfing the base salary.

One thing to note is that carried interest is earned over time, and a senior PE professional may not receive these amounts in cash for many years, depending on how the PE fund is structured. In a “whole-fund” model, a PE professional doesn’t receive carried interest until investors recover their investment plus a preferred return. In a “deal-by-deal” model, carried interest distributions are made on a deal-by-deal basis.

In other words, in a deal-by-deal model, carried interest may be paid out to PE professionals before limited partners recover their investment and a preferred return. Because of this, a PE firm might have to have a clawback provision so limited partners can recover their investment should the total PE fund end up performing poorly.

How Does Carried Interest Work?

To understand how carried interest works, let’s look at an example.

Let’s assume the PE firm raises $1 billion from limited partners. Further, assume that the PE firm sells all of its investments, generating $3 billion in 5 years (roughly a 25% IRR). In this example, the PE firm will be entitled to 20% of the profits (the carried interest).

First, the limited partners would get their $1 billion investment back. Then the limited partners would get a preferred return. If the preferred return is 8% per year for five years, this represents an additional $469,328,077 that would be paid to LPs [($1,000,000,000 * 1.08^5) – 1,000,000,000]. This leaves proceeds of $1,530,671,923.

After the preferred return is paid to LPs, the PE firm is able to receive some proceeds, known as the “catch-up.” The catch-up is calculated by taking the preferred return and dividing it by 1 minus the 20% carried interest. This results in $586,660,096. However, $469,328,077 was paid to limited partners, leaving the difference of $117,332,019, which is the catch-up amount the PE firm receives. Note that this equates to 20% of the profits at this point: $117,332,019/586,660,096.

The remaining proceeds of $1,413,339,904 ($3,000,000,000 – 1,000,000,000 – 469,328,077 – 117,332,019) is then split 80% to limited partners ($1,130,671,923) and 20% to the PE firm ($282,667,981).

We can verify that the PE firm received 20% of the profits. Since $3 billion was raised when the PE firm exited the $1 billion in investments, the total profit is $2 billion. The PE firm earned the catch-up of $117,332,019 and the 20% split after the catch-up of $282,667,981 for a total of $400 million, or 20% of the $2 billion in profit.

The carried interest would then be paid to any private equity professionals that have carried interests. Let’s say a managing director has a 0.5% carried interest. The MD would receive $2,000,000 (0.5% * $400 million).

Factors That Influence Private Equity Salaries

Several factors influence total compensation, including the following:

• Performance: Obtaining the most compensation is dependent on individual performance, as well as overall fund performance. If the fund performs poorly, then the compensation potential will be lower, regardless of individual performance.
• Location: As mentioned earlier, the above numbers are based on PE firms in the United States. Total compensation is typically lower in other regions like Asia or Europe. Of course, major financial centers like New York City will pay better than a comparable position in Dallas, for instance.
• Firm Size: Mega funds with greater assets under management typically pay better than smaller firms due to the higher asset base and ability to structure more complex deals. However, moving up to a larger firm may be more difficult due to greater competition.

Private Equity Compensation Trends

Private equity has performed pretty well over the recent past, resulting in relatively high compensation. Of course, interest rates were quite low, which led to greater buyouts and investments. Will this trend continue into the future with higher interest rates? Time will tell.

One thing that is hotly debated and subject to change is known as the carried interest tax loophole. In the United States, tax on carried interest is usually treated as capital gains tax instead of ordinary income tax, and capital gains tax rates are typically lower than income tax rates. Because of this, there has been political pressure to change this tax treatment of carried interest to income tax. While this has yet to happen, it does potentially pose a risk to compensation in the future.

Conclusion

Private equity is one of the most prestigious and lucrative career opportunities in finance. However, it’s important to note that high salaries and bonuses are reflective of the demanding nature of the work, the long hours, and the high levels of responsibility and risk involved. For those who are passionate about investing and thrive in a high-stakes environment, a career in private equity can be both financially and professionally fulfilling.

Additional Resources

Thank you for reading CFI’s guide to Private Equity Salaries. To keep advancing your career, the additional CFI resources below will be useful:

• CFI’s Career Map
• Buy Side vs Sell Side
• Remuneration
• Stock-Based Compensation
• See all career resources