MM&K and its partner firm in the US, Holt Private Equity Consultants, have published their 2019 Survey Reports on Compensation in the UK and North American Private Equity and Venture Capital Fund Management industries.
Nigel Mills reflects on some of the key findings in the Reports with regard to pay levels on both sides of the pond, and the levels of Management fees and Performance fees (or Carry).
In October MM&K and Holt Private Equity Consultants published their 2019 European and North American Private Equity and Venture Capital Compensation Reports. The Reports are derived from Surveys that were conducted in the year into pay and incentive practices in the European and North American PE and VC fund management industries.
Some of the key findings from the surveys and commentary thereon are set out below.
The headline takeaway is that the market for top-quality talent in the sector remains extremely competitive. We see that the sector generally is booming with a large number of firms recruiting both in the US and in Europe, either with a view to simply increasing their headcount to deal with the strength of the business pipeline or in some cases to move into the sector for the first time.
The stats from both North America and Europe showed significant increases in total cash compensation for non-partner investment professionals across all strategies. And, as in Europe, the North American VC data showed that the VC strategy, in particular, is doing particularly well in the United States.
As most observers will know, the ability to reward and incentivise key talent in this industry is very dependent on the revenues that the firms make from management and performance fees (or carry). It is interesting to observe the slightly differing fee structures as between the European and North American Houses. In both territories, the standard fee structure remains 2% Management fee and 20% Carry (two and twenty). These still represent the median numbers for all participating houses both in Europe and North America. However, when one delves a little deeper, one sees that whilst this is still the standard for the Buy-out and growth capital houses, the numbers look a little different for the VC houses and for the fund-of-fund entities.
In Europe, the median annual management fee for VC funds is 2.3%, whilst in North America it is 2.4%, perhaps unsurprisingly quite a bit higher than for the Buy-out houses. In sharp contrast to this, for fund-of-funds managers, the typical annual management fee is 1%, both in Europe and in North America, and for larger funds it is actually some way below this.
20% carry is still the norm for the large majority of independent direct investing fund managers, although one does still see quite a number of 25% carry plans in VC houses in the United States. In fact, the upper quartile figure for VC Carry in North America is 25%, whilst in Europe it is 21%. This would suggest that over 25% of VC funds in the United States have a carry percentage of 25% or greater.
Interestingly (and in our view rather surprisingly) we have not seen much movement in these figures over the last ten years or so. However, the one area where we are starting to see some movement is in the hurdle rates of return applying to carry plans. In the European Report, 18% of carried interest plans now have a hurdle rate of less than 8%. A few years ago, there would not be any plans (in the UK at least) with hurdle rates below 8%.
One last interesting statistic relating to differences we are seeing between European Houses and North American firms is to do with how widespread the Carry is among the members of the firm. In North America it seems that over 80% of the carry is spread among the partners and only c 18% goes to non-partners. In Europe, we are seeing carry being spread more widely among the more junior investment professionals with only c 68% of the carry being allocated to the partners. It may well be that in the UK, in particular, there is a greater recognition of the need to incentivise and retain the more junior investment professionals in a very competitive market place. Offering them a small slice of the carry can help to do this.