T&I Asia Watch provides reporting and intelligence on the private equity industry in the Asia Pacific and India regions. “T&I” publishes a weekly update on deals and events that are impacting the PE / Direct Investment market, as well as an in-depth interview with a senior personality from a general partner (GP), captive fund or one of the businesses that are helping to shape the PE landscape in the region.
T&I is headed by Editor in Chief, Jerry Borrell, a veteran of the Asian PE markets. Jerry previously served as the Senior Editor, Venture Capital Journal, PE Week and Founding Editor, Asian Private Equity News, Thomson Financial.
For the week of September 11, 2009, Jerry sat down with Michael Raytek of Hunt Partners for an in-depth look at compensation levels in the PE industry in the region. Below is a reproduction of that interview.
Partners Annual Comp Survey
Mike Raytek, Hunt Partners
Once a year T&I works with Hong Kong PE recruitment firm, Hunt Partners and its private equity recruiter, Mike Raytek and his colleagues at the firm to provide our readers with an overview of the salary and compensation trends for the alternatives investment industry. And each year Hunt has expanded its outreach into our industry to make its survey ever better. This year is no exception, as Hunt made an exceptional effort of outreach to include new job titles in its research (COO) and expanded beyond the realm of PE firms, to include funds of funds for the first time. Given the growth of the latter group, especially in the Hong Kong community we applaud Hunt’s effort on behalf of the alternatives industry in Asia. And for those of you who would like to access the full results, you need only promise to collaborate on next year’s survey to obtain the full details. Our thanks to Hunt and Raytek for helping build a better working environment for everyone involved in our community and for the weeks of effort that went into the survey.
T&I: Mike, give us a brief update on Hunt before we proceed.
MR: Work slowed down during the] height of the economic downturn and we had some projects that were on hold, from a long time ago. But as client work has ramped back up, and with some new business coming in on the equity side, we added two staff in the Hong Kong office in June of this year.
T&I: And your India office?
MR: India experienced the same decline in business that we saw and which manifested itself from Q3 to Q4 of 2008 and which carried through Q2 of 2009. And like us, they’ve seen business pick up over the last few months, but the Mumbai office maintained its staff size; they had opened a Bangalore office two years ago and we still maintain our staff of four in Bangalore. We continue to have two people on the ground in Shanghai and one more in Beijing. The three staff on the ground in China work a lot with portfolio companies and help out on GP and LP searches as well. But our Hong Kong and Mumbai based teams do the lion’s share of the work across Asia Pacific with the GP and LP recruitment.
T&I: Tell us about the fourth annual Hunt Partners Compensation Survey.
MR: This year we had twelve participants, the same number as last year, but the mix was a bit different, with two firms not participating from last year and two new participants joining in. Having said that, we expanded our work this year, to launch a private equity fund of funds survey for the first time, which had five participants. The latter is great, but since it’s a first year for fund of funds, we don’t have previous year’s data to compare to this year’s data.
T&I: The good news is that limited partners have joined your survey for the first time.
MR: Right.
T&I: Who participated in the survey and where are they based?
MR: We include all private equity firms that compete in general for the same talent pool. So for example, if there is a PE firm that invests in Taiwan or Korea only and they wanted to join the survey, we wouldn’t be able to include their data. We have included a couple of firms that focus on China, but they’re able to invest outside of China and therefore they share a similar talent pool with other participants in the survey.
Comp 2009
T&I: They’re all regional investors?
MR: They’re all regional Asian PE firms, with a couple of exceptions who are global investors, but the numbers used in the survey are from their teams based in Asia.
T&I: What is the typical profile of the respondent to your survey?
MR: On average they had 18 investment professionals, not including any part time or consulting that they may have used. The average assets under management, was just over $1 billion. The average number of employees, throughout the firm was 35. And the average percentage of dry power, of all the participants, was at 45%. Combining average fund size and the amount of unutilized capital, gives you some idea of the amount of investment capital that remains in the marketplace. In terms of geography, 73% of the firms say they’re pan-Asian, 18% said that they had a greater China focus and 9% said that they had a Southeast Asia focus. Strategies across the investments of the participating firms ranged from minority/growth capital making up 30% of our respondents, controlling stake, or buyout investors making up 18% of the respondents, infrastructure funds 11%, special situations 4.5%, mezzanine 20%, real estate 3% and VC made up 9%. Most of the respondents have multiple types of funds or investment strategies within investment classes I just mentioned.
T&I: Why no Japanese participants?
MR: Well, we’ve struggled with that question, but gathering data from Japan would be difficult and not right for this survey. There is also the question of our requirements for participation, which excludes Japanese firms, because the talent pool there is specific to the Japanese market. Having said that, we recognize that most of the Japanese firms do fall in line with the compensation levels in this survey.
T&I: What has hiring been like this year for private equity professionals?
MR: It’s definitely down. If I compare our practice from the summer of 2008 to now, the summer of 2009, we’re probably down 50% in terms of hiring of private equity professionals or investment staff. Having said that, we work with some private equity firms on their portfolio companies and that has actually increased for us. Those positions are typically CEOs, COOs, or CFOs. I think it’s a reflection that during the last twelve months, firms have had an expectation that they’ll hold on to their portfolio companies longer. In fact, we asked that question in this compensation survey, about the expectation for an average hold period and the majority of the firms responding said that there was going to be an increase in the hold period.
T&I: You’re hiring more for GPs on their portfolio companies because?
MR: I have the sense that private equity firms feel that they have to work more with what they have, rather than look at spending money on new investments in the past 12 months.
T&I: Do the LP firms hiring and opening office in Hong Kong contact you yet?
MR: We have worked for LPs although more of our work has been with the GPs. If you look at the people that many new LPs in Asia have placed out here, most of senior staff have been sent over here, or may have been someone known to them before hand. There hasn’t been a lot of executive recruitment among these executives yet. It may be that as they develop their teams,that is the next logical step.
T&I: What’s driving the expansion of LPs in Hong Kong?
MR: I assume it’s their need to get someone close to their GPs and to the market and with the thought that they’re going to be making more co-investments. With someone or a team on the ground in Asia, you can imagine that headquarters will have a higher degree of comfort when putting money into the region. Also, the fund-of-funds from abroad likely have clients that want exposure to the Asian PE market, so it’s an extension of their relationships. This can only be good for the Asia markets as it means allocations to PE here should continue to grow.
T&I: My other observation is that LPs are building direct investment teams for Asia.
MR: I think that is probably happening and that it’s probably predictable, as we mature our private equity markets here, to follow the US example. I think that it’s a trend that is naturally going to occur.
T&I: Talk about the survey methodology for a moment?
MR: Our original survey is divided up into two surveys, which gather data for two different sized or groups of firms; that is, firms of differently sized assets under management.
T&I: But the data that you’re giving us here is the average of those two groups together?
MR: Today we’re discussing the average figure that goes across all 12 of the participants as well as data that we have from all of our work in alternatives. In certain categories that means we have data for another two to three firms. This is data that has come from either firms we’re working with or candidates for positions in other firms. It’s a tough job, including that data, as we need to qualify the accuracy of the data before we can include all of it in our survey.
T&I: I don’t want to start on a bad note, but I do have a sense that our community is under stress?
MR: You’re right. It’s been a difficult year. And a lot firms have faced stressful circumstances.
I’ll give you an anecdote to illustrate this. When we went to participants to acquire the information this year, we had more difficulty getting data than we’ve had in the past three years.
I suppose It’s natural for people to want to talk when there are good things to be said, but I will make the observation that in Greater China and Asia in general, there is more dissatisfaction at the GP level with various issues, than we have seen in the past, and we’re seeing that show up in the higher turnover in the last six months than I’ve seen in the industry in probably the last five years.
T&I: Why, what’s going on?
MR: There are various reasons, but fees are a factor. A lot of firms that anticipated that they would raise new funds this year, or not that far in the future, have seen those hopes dissipate. It’s a difficult time to raise funds, so general partnerships are putting the squeeze on their own teams in some cases. For example, the bonuses for the past year, overall, were down on average at all levels, by 50% year-on-year. On top of that, the delay in fund raising puts stress on teams, creating dissatisfaction in one of two ways, either related to compensation or to the lack of opportunities. But it shows up in lots of ways among various teams.
T&I: Let’s walk through the survey, beginning at the entry level.
MR: These are the analysts, the same level that investment banks start newcomers. They may be hired out of school, but some have up to three years of experience as analysts. They’re doing pure number crunching. But unlike investment banks, many PE firms don’t hire analysts, they start to hire at an associate level. Only half of our participating firms have analysts. Typically this is their first job out of college, but they may have a year or two of experience at another firm before entering private equity. The base salary for analysts is $50,000, which was a decrease year on year, of 18% from last year. Investment banks pay a bit more at this level. These aren’t MBA’s, but even if they’re only BA’s they’re not paying off their student loans, the drop in salary doesn’t help. What happened was that the new hires made during the last year were caught up in the stress of the industry, as the entry level was squeezed.
T&I: Next are Associates. Who are they and what are their qualifications?
MR: These might be Post-MBAs getting back into the work force, although most first and second year associates do not have MBAs. Usually associates are analysts who have done three years as an analyst and then moved up to the Associate Level; though it might only be two years at an analyst. At the Associate level, salaries were down only 6% for the year, down to $80,000 dollars per annum and their bonus was down 51%, year on year. A lot of these people are coming from investment banking and joining PE as a first or second year associate. The base salary from this level on up in the survey was not down by much from last year, although the bonus portion was significantly hit.
T&I: Then Senior Associates. Who are they?
MR: They’ve spent at least a year or two as an Associate. They’re becoming a little more involved in deals, beyond just doing financial modeling and number crunching. They had a slight increase in salary over the year, compared to last year but their bonus dropped by 59% to $110,000. This is the first level at which carry kicks in at more than half of the firms. Having said that, we had two firms that paid carry at the Associate level and one firm that even pays analysts carry.
T&I: The next level takes us to Vice President.
MR: VP or Principal and at this level, salary actually increased by 7% to $168,000 on the other hand, the decrease in bonus was only 37%. And I can’t point to a single reason why they decreased less than among other groups, but perhaps there was title stagflation as firms were reluctant to promote Principals into the Partner level. By increasing the base and not cutting the bonus as much as others, this may have been some form of consolation. Principals or VPs typically have an MBA and a few years of private equity experience or at least five years of relevant experience. These are the future leaders of firms and some are starting to lead deals. There are some at this level who were hired just as the technology depression was coming to an end sometime after 2003.
T&I: It’s an inflection point, they’ve got five years in PE, they’ve chosen their career.
MR: You’re right, they’re making a quarter of a million dollars or more per annum in compensation, plus carry, they’re very involved in deals, they’re starting to be more commercially savvy, they may be sourcing deals and at some companies they’re sitting on boards. I might add that all participants in the survey at this level pay carry, so yes, they are now economically more tied-into the firm.
T&I: Which brings us to Director or Junior Partner level.
MR: At this level we see very little decrease in salary, which was down only by 2% over the previous year to $234,000, but the bonus decrease at 54% was close to the average across the survey. There were few surprises here, but the base salary did not decline at this level. Firm’s can’t afford to lose people at this level. Looking at all the salaries, there were really no deep cuts in salary, although several categories took a big hit on their bonus. The final thing to be said about Directors is that at this level, they have much greater exposure to the carry, than at the previous level. Directors, on average, have double the carry of VPs or Principals.
T&I: Explain how you measure participation in carried interest?
MR: The way we look at carried interest is to look back at the dollars at work, which we define as the percentage of the carry, weighted against the size of the fund. So for example, if the fund is $100 million and you have 2 points out of 20 of carried interest, then the calculation would be $2 million “dollars at work”. If it’s a $200 million dollar fund and you’ve got 1 point, it’s still $2 million dollars at work. We bring carry back to reflect the difference in the size of the funds and therefore a PE professional’s overall economic participation.
T&I: These are dollars paid at year end, accrued against the potential eventual success of a fund?
MR: The dollars at work reflects the amount of potential carry to be paid in the future. If the fund increases in value over its life based on a certain IRR, you know how this translates into your economic participation, or participation in the success, of the fund.
T&I: Now, we’re at the position of Managing Director or Senior Partner?
MR: Right, these are the top three to six people at a firm. And for these all-important people the base salary maintains itself and is up 4% to 5%, year on year to $326,000. Bonuses are down 47% at this level from last year. But carry interested amounted to $13.5 million of dollars at work per managing director. The average compensation for a managing director was below $500,000, whereas last year it was over $500,000, before carry.
T&I: What happened at the CEO, the Founding, or Managing Partner level?
MR: Their total cash compensation is down only 5% and in fact, their base salary is up 9% for the year, bonuses only declined by 21% for the year. So the top person at private equity firms, had the smallest decline in overall compensation. Their base plus bonus compensation averaged $715,000 this year. Compared to the average investment banker, they did better. In previous years, the top investment bankers were making a few million dollars. But much of that was in stock options. This year, those who had deferrals in stock options, on the banking side, were hit pretty badly.
T&I: Salaries in private equity were more robust than those of investment banking this year?
MR: If you factor in the carried interest, and if you consider that investment bankers had deferred payment through stock options, private equity held up better, although some carried interest pools were knocked down hard as a result of mark-to-market.
T&I: And now for the CFO’s.
MR: They followed the trend present in other positions. Their bonuses were down 57%, their mean salary stayed close to the previous year. They are the head of finance for a specific fund typically, or heads of finance across the funds at a smaller PE firm. They manage the financial reporting, tax planning, manage risk and cash positions as well as FX or leverage, oversee payroll, expenses and admin and are involved in structuring of investments.
T&I: Are CFO’s on the increase at private equity firms?
MR: The trend that we’ve observed is for more COO’s which is why we created this title this year. So for the first time, we gathered date on the COO position. Some of the smaller funds in the survey do not have a COO, in fact only four firms out of our twelve respondents, had a COO, and if you look at the four that do, the average assets under management are more than $1.8 billion. It is a reflection of the fact that at a certain size, funds look for someone who to run and to be responsible for everything other than the ongoing investment process and to be significant to the overall firm strategy. COOs supervise everything outside of the investment process: finance, HR, marketing, fund raising, IT, and they’re involved in the overall strategic direction of the firm.
T&I: I’m surprised you have no CIO position in the survey. I recall thinking the same last year.
MR: In many cases in Asia CEO is equivalent to CIO, which is not a title that we have seen on the increase in the last couple of years.
T&I: Almost every LP that we talk to has a CIO position.
MR: I think that by their nature, most GPs have the investment function within the partner role, that at the most senior level of these firms, they’re de facto CIOs.
T&I: Let’s review the first year’s data for fund of fund participants.
MR: We noticed last year, that there a couple of fund of funds who wanted to participate, but we discovered through compiling the data, that we just couldn’t fit their data into the private equity survey. It was a different talent pool typically and compensation levels reflect that. In general compensation is lower for LPs than GPs across the board, from the base to the bonus, although bonuses as a percentage of the base salary are not that different from private equity, we’re talking about a smaller base, resulting in less money.
T&I: Walk through the LP titles and salaries.
MR: At the analyst level, not surprisingly, these people are like those in GP firms, coming out of University, with up to three years experience. The base is the same, bonuses are the same, next to nothing. Then we get to the Associate and Senior Associate level and here the base was $63,000 to $110,000, with a very small bonus. After Associates we really get to a myriad of titles such as Investment Manager, Investment Officer, Portfolio Manager and VP. Generally these are equivalent to VP in the GP world and the average of base plus bonus was $186,000. After this level we see titles such as Principal or Senior Principal, Investment Director, Senior Investment Officer and then at the top levels we see MD or Senior Investment Officer with base plus bonus comp at $375,000. So you can see there is a gap between the GPs and the LPs in terms of yearly base and bonus compensation.
T&I: Compare LP and GPs at mid-level.
MR: The base salary is about 20% lower at fund-of-funds than at GPs and above this level, we see that compensation spread between LPs and GPs grows apart further. But at this level, of VP or Principal, LPs are making $186,000 in base and bonus. This is partly a reflection of a difficult year.
T&I: At the Director equivalent level?
MR: The gap increases between the LPs and the GPs. In the survey there is a difference of 32% on comparing base salaries.
T&I: Across the board they earn?
MR: The Senior Director is making $270,000. The Managing Director is making $350,000. And the top level is making $400,000, compared to $715,000 for total compensation at the top level for a GP.
T&I: Fund of Funds, but next year?
MR: Right next year we’ll be more complete with fund of fund data or LP data. It’s the fastest growing segment of the private equity market in Asia, in terms of staffing.
End of the T&I Interview | 
