Javier Espinoza, Private Capital Correspondent
A rising number of former bankers are joining the ranks of private equity groups in Europe despite sometimes taking a pay cut to do so, according to new research.
There has been a significant uptick in the number of junior bankers going into private equity positions in the past two years, from one in five job moves in 2015 to one in three last year, an analysis by New York-based recruiter Options Group found.
In some cases, former bankers have taken a pay cut to join private equity groups in places such as the UK, US, Switzerland and Hong Kong, the study said.
The average compensation for both junior and senior staff is marginally lower in private equity firms than in banks.
Total compensation in 2017, including salary plus cash and non-cash bonuses, was on average $248,000 and $351,000 for junior and senior bankers respectively, according to Options Group. That compares to $180,000 for junior private equity executives and $315,000 for more experienced ones.
The figures are based on a survey of more than 3,800 industry professionals.
The growing popularity of private equity among younger bankers comes at a time when the industry is raising the largest amount of funds ever and seeing the highest level of activity since the start of the financial crisis a decade ago.
Jan Veder, co-head of Options Group’s Frankfurt office, said: “Private equity is strong in raising money and they need good people to find deals.” Junior roles in private equity involve more strategic and influential work than the equivalent status in banks, according to sector recruiters, and that is proving to be a lure. And despite lower headline compensation figures, the favourable tax incentives in private equity are also a key motivator for bankers to ditch their industry.
Private equity executives pay less tax on carried interest, which is usually taxed at the lower rate of capital gains rather than income tax. “Private equity acts as a good wealth accumulator for some people who take the long view,” said Zane Hurst, a former banker and London instructor for both junior bankers and private equity executives at financial training company Training The Street.
The trend is a reflection of stronger long-term incentives and bonuses in the private equity industry, according to a veteran executive at a multibillion-pound buyout fund in London. “In banking often you do not get paid bonuses in cash but in stock and you have to wait many years to cash in,” said the executive, who is also a former banker. “In private equity you get paid in cash. It may take as long or longer but [when a deal closes] you are successful.”
This person added: “The benefits for young people to stay in banking are not so clear any more.”
In response to the hiring competition, Training The Street’s Mr Hurst noted that banks have begun to increase their compensation schemes in a bid to keep junior people in their sector. “Banks are also encouraging people to move within the bank and find roles that are not so intensive,” he said.