June 13, 2018

Operating Partner Compensation

Operating Partner Compensation

It’s been just a little over a year now that I’ve been writing this blog… and it’s finally time to address the topic of Operating Partner compensation.

To begin, this is not a scientific study.  These are my own conclusions after having run numerous searches and interviewing hundreds of prospects.  Others may have a different experience. That said, I feel pretty good about the accuracy of the opinions; and there’s certainly more that I can share in private if interested.

A caution to the PE firms:

These numbers represent the cost to recruit Operating Partner talent on the open market.  Keeping that in mind, understand that they will necessarily incorporate some level of premium in order to entice the prospect to consider making a switch.  If you think that you can recruit over an experienced lateral paying them inside the ranges that you’ve read in your HR department’s comp consultant’s reports, please don’t waste your time.

It should also come as no surprise to deal people that compensation is as the market dictates.  Both firms and candidates must simply accept this as fact.

A caution to the candidate pool:

If you’re a candidate, you must understand that Private Equity is not the golden ticket wrapped around the chocolate bar.  It’s not all private jets and houses in the Hamptons. Again, on your way in, your compensation will fall in line with where the market places you.  You must remember that the “buyers” of your talent are in the top 1% of deal makers globally.  They’ve seen this movie before.

OK, so here we go…

  • Cash compensation. In order to recruit an experienced Managing Director level person laterally into your portfolio operations group expect to pay annual cash somewhere +/- $1,000,000.
  • Base salaries vary widely. Some firms adhere to the old investment banking approach where the Base is very modest (I’ve seen $125,000 in some cases), and the bonuses are enormous.  Candidates need to understand early on how the firm approaches the Base because many people may not be conditioned in their lives to take a cash flow haircut for the first year until the bonus kicks in.
  • If you’re not making your bonus, there’s a problem. Unless there’s some macro calamity, it’s a sign that you should be concerned about your longevity.  Something isn’t going right.
  • Required co-invests can make the first few years cash poor for a candidate. Make sure to explore this element early on.
  • Carry/equity. There are different views and ways to approach this element which I will not get into here. Moreover, the actual mechanics of basis points and dollars at work and hurdle rates can all be very confusing even from firm to firm.  As such, I like to get the clients to set an expectation for a candidate by painting the picture of the expected 5-year return, and then turning that into an annualized number.  With that idea in mind, in order to recruit an experienced Managing Director level person laterally into your portfolio operations group expect to pay annual carry/equity +/- $1,500,000.
  • Over time as new funds are raised and an Operating Partner has interest in multiple funds, the layers build up making it very tough to consider leaving. Trying to make a lateral “whole” in order to bring them over may cause some real heartburn inside the firm.

Hope that you found this useful, even if just as a starting point.  As you can imagine, as the seniority of the prospective role increases or decreases the numbers will adjust accordingly.

Please feel free to reach out to discuss in more detail.  Until then, stay well.



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