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January 19, 2007

Venture Capital and Private Equity Compensation 2007

posted by MR WAVETHEORY at 1/19/2007 08:34:00 AM
Everyone wants to know what everyone else made. Thanks to a spammer who sent me a report on venture capital compensation - the culprit will go unnamed but I will say they are one of the least reputable headhunters out there - so I thought I'd spam the rest of you with it. After all, isn't the point of spam, the shameless distribution of material to people who have not solicited it? In the spirit of spamming, here's what happened in venture capital compensation 2007.

The short story, lots of self-serving, undeserving people (who have shallow personalities and big egos and big fat pointy noses and oh did I mention would sell their grandmothers) made lots of money. Isn't that always the story? Welcome to the money game.

Basically, associates at VC funds make ($200,000) and PE Funds make ($300,000). Fund of Funds associates make $200,000 - but they do less work. So, that's more money in my book when normalized. VP and Partner comp from the report ... I wouldn't put much salt on the numbers so I feel obligated not to share the misinformation. It's too subjective, so don't let anyone convince you otherwise.

And the touchy feely stuff ...

Just as it seems investors’ comfort level with private equity investments has further developed so too has the infrastructure and overall stability of the industry. And, this growth and development has extended to how professionals are compensated. In many ways the industry has become more institutionalized with more people filling more layers of roles. As the market has developed we’ve noticed that the volume of demand for professionals at nearly all levels has increased and the hiring market itself has become a fluid process both in terms of how professionals are compensated and when and how they are hired.

Some General Observations
Overall, most indications are that it has been a solid year for Wall Street and the financial markets in general where compensation has been up and hiring has been steady. In our view, the same can be said of alternative assets where fundraising has been strong, new positions continue to be created and pay has been rising across all asset classes. In fact, as evident from this report, total compensation for nearly all titles increased from last year’s levels, with most of the gains coming from increases in bonuses.

Not surprisingly,we’ve observed that compensation at later-stage private equity firms (buyout/growth equity funds), early-stage venture capital firms and private equity fund of funds increases significantly as fund size increases and as the titles increase in seniority.

The main driver of the increase in compensation continues to be the large amount of capital that poured into all alternative assets including buyouts (where fundraising set new records), venture capital and fund of funds. As in other years, we continue to see that buyout/growth equity funds pay more than venture capital funds and fund of funds.This is for two basic reasons: (1) they have larger management fees because, on average, they have more capital
under management, and (2) the financial skill sets demanded are usually more rigorous and competitive with Wall Street and thus more costly as compensation there has been driven higher.

Private Equity
• The record-breaking fundraising by several large buyout/growth equity funds (“mega-funds”) over the past couple of years has led to heightened demand for people to help invest those funds. Specifically, the increased competitive pressures for top talent pushed compensation higher at the mega-funds and had a trickle-down effect throughout the industry pushing compensation up at the mid- to larger-sized funds which had to keep pace if they wanted to retain and attract top talent.

• Competition from hedge funds, which continued to lure away some of the same talent, was another factor that drove compensation higher.

• The positions that are considered to be the future leaders of buyout/growth equity firms—the Senior Associates,VPs and Principals—saw the biggest gains in compensation at those firms.Total average compensation for Senior Associates,VPs and Principals rose 16%, 18% and 9%, respectively.

Venture Capital
• There is a trend within venture capital toward some funds raising large amounts of capital to do more multi-stage investing. We have seen these larger VC funds raising compensation
as part of their efforts to bring on some of the same people who are predominantly targeted by buyout funds.
• In addition to matching compensation levels of buyout funds, some large VC funds are also implementing a more bonus heavy structure.
• The positions that saw the biggest gains in total average compensation at VC firms were VPs (up 16%), Senior Associates (up 12%) and Associates (up 12%).

Fund of Funds
• As a group, there was not much movement on the compensation front among smaller funds.
• The most significant increases were mainly at the more senior roles such as VP and Principal where overall total average compensation regardless of fund size rose 6% and 9%, respectively.
• Larger fund of funds have been pursuing increased co-investment activities. As they emphasize this strategy they are starting to demand more of an analytical/investment skill set and are competing more with private equity funds for some of that talent.
• To attract those professionals who would normally have later stage private equity options we’ve seen the larger fund of funds starting to mimic buyout funds in the way they structure
compensation—namely that a higher percentage of total compensation is in the form of bonuses.

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