Successful private capital companies long ago ditched their spreadsheets and moved to digital tools for accounting and other middle-office tasks as part of a larger trend to improve efficiency, controls and operational transparency. But there is one feature that is in dire need of the same modernization: compensation.
Private markets overshadow public markets, and the trend isn’t showing it to stop. Alternative assets under management are poised to exceed $17 trillion by 2025 — a 9.8% compound annual growth rate that far outpaces both global GDP and inflation, according to research firm preqin.
With that growth, increased operational maturity and a focus on talent is a top strategic priority in companies of all sizes.
It’s not hard to see why. In alternative investments, success is much more driven by: human intelligence, judgment, relationships and reputation than by algorithms. When your second most important asset is walking out the door every day (physical or virtual), attracting and retaining that talent is paramount.
Between salary, bonus, vesting, carry interest, and management company ownership, it can be nearly impossible for employees to know where they stand financially.
It’s no myth that many analyst/associate-level investment bankers dream of getting on the buy side – the romantic fantasy of attaining “master of the universe” status has long been supplanted by a less romantic, data-driven mindset that is attracted by the meritocratic culture (and a very favorable compensation model) of private capital.
But when it comes to attracting and retaining the best and brightest, there is no such thing as a slam dunk. While a talented young employee may make the sideways move into your company with a view to growing overall pay over time, there’s no guarantee they’ll be left sitting until they hit the magical threshold of earning carry. have reached interest – usually not until the fourth year, five or six. From a retention standpoint, those early years are the most vulnerable (a factor exacerbated by the current Great Resignation trend).
There is a way to win the loyalty of the people who hold your future success in their hands. offer them compensation transparency — 360-degree understanding of the issues that matter most to them when charting their career — in everything from salaries, benefits, bonuses, interest-based allocations, co-investments, past benefits, and forecasting (or dollars at work).
Hidden costs and hidden risks
While the private capital compensation system rewards longevity, it comes with a hidden price: complexity and opacity on top of the “predictable unpredictability” that characterizes the industry.
It is difficult for an employee to know what they have, what they will have, what they power have or understand the rights and obligations of both entrants and departs. And in a chargeback situation, where employees can be forced to repay previously received carry interest, there can be additional complications and tax consequences for everyone.
The SEC has taken note. Commissioner Allison Herren Lee recently described equity workers as “investors with a lot at stake”, who are nevertheless unable to determine the “full financial consequences of leaving their jobs” – essentially an “investment decision made in the should be taken dark”.
This development is just one element of a larger story: the committee’s growing oversight of private funds, from proposed changes to the Form PF rules for material event disclosure to a 341-page document of proposals aimed at more transparency in private funds.
