Compensation levels decline as investors push for more returns

Compensation levels decline as investors push for more returns
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First Published: Mon, Aug 17 2009. 11 02 PM IST

Pay cut: Luis Miranda (left), CEO, IDFC Private Equity; and Renuka Ramnath, former managing director and CEO, ICICI Venture. Kedar Bhat / Mint
Pay cut: Luis Miranda (left), CEO, IDFC Private Equity; and Renuka Ramnath, former managing director and CEO, ICICI Venture. Kedar Bhat / Mint
Updated: Mon, Aug 17 2009. 11 02 PM IST
Salaries of top Indian private equity (PE) professionals—who take home anywhere between Rs25 lakh and Rs4 crore a year—have taken a knock this year because the number of deals and exits from investments slowed in the year ended 31 March.
Pay cut: Luis Miranda (left), CEO, IDFC Private Equity; and Renuka Ramnath, former managing director and CEO, ICICI Venture. Kedar Bhat / Mint
Pay hikes are also expected to be muted this year as investors are pushing for more returns on their money.
“The compensation for the VC (venture capital) and PE industry has saturated,” said Sunit Mehra, managing partner and founder, Hunt Partners, a recruitment firm focused on PE and venture capital.
“Existing funds have rationalized annual bonuses and raises,” said Shalini Sethi, chairperson and managing director, Emploi Globale, a Bangalore-based recruitment firm focused on the private equity and investment banking industry. “This has been done across funds.”
According to a 2009 study of pay in PE firms conducted by Hunt Partners, there has been a fall in the compensation of PE professionals, especially at the vice-president and director levels. These senior professionals source, negotiate and close transactions, monitor them and even sit on boards of portfolio companies.
Graphics: Sandeep Bhatnagar / Mint
Their seniors—managing directors and partners, who make portfolio investment decisions and guide the firm’s strategy—also did not get pay hikes owing to a slowdown in deals and absence of liquidity events (such as initial public offerings and strategic sales) in the past couple of years.
While most PE professionals took home around 10-15% less money than they did the previous year, their juniors—associates and senior associates—fared a little better. Salaries at the junior level—those engaged in analytical and research functions—were higher across all funds and sizes as pay is a key talent retention tool in this segment.
The compensation levels in PE firms have a direct correlation with deal flow. Indian PE deals have fallen drastically in 2008, compared with the previous year. There were 433 PE deals worth $15 billion (Rs73,050 crore) in 2007, compared with 470 deals worth $11.7 billion in 2008, marking a 20% decline in the value of deals.
Besides, many new funds looking to set up office in India have put their plans on hold, while firms such as Englefield Capital Llp and Babcock and Brown Ltd have shuttered India operations. These have resulted in depressed hiring and salary hikes.
Industry recruiters say salaries have rationalized across the board. “In 2010, I do see this cautious approach continuing as exits have got delayed and many funds may ask for extensions. So saving on compensation becomes the key to the general partners’ (management of a limited partnership) strategy,” said Sethi.
There are also pressures and, in some cases, demands from limited partners (investors in funds) to moderate the excesses in pay. “Limited partners (LPs) are getting much tougher now on negotiating carried interest or carry (the gains from the fund over and above the investment) with their general partners,” said Shekhar Purohit, principal, Asia-Pacific leader for executive compensation and corporate governance, Hewitt Associates Llc, a human resources consulting firm.
Most PE firms work on a compensation model in which they get 2% of the funds under management as fee every year and 20% of the profits. Funds typically have a minimum guaranteed rate of return of 8% and the team will be eligible for the 20% only if the returns cross 8%.
The salaries of professionals are also dependent on fund sizes. A partner at a $250-500 million fund may draw a maximum of $242,000 a year, while his counterparts at a fund of $500 million to $1 billion will get about $442,000.
It is difficult to get specific data on compensation packages of PE firms. However, data on pay of top executives are available for listed PE firms.
For instance, the 2008-09 annual report of IL&FS Investment Managers Ltd (IIML) showed its chief executive officer and managing director Archana Hingorani drew Rs4.17 crore in the year ended 31 March, including incentives. Even though the PE environment has been tough, Hingorani’s pay is likely to go up this year as the firm raised an $895 million real estate fund last year, taking its total funds under management to $2.8 billion.
Luis Miranda, chief executive of IDFC Private Equity, the PE arm of Infrastructure Development Finance Co. Ltd, took home Rs2.8 crore last year, according to IDFC’s annual report. IDFC Private Equity, which has investments in India’s premier infrastructure projects such as the New Delhi, Hyderabad and Bangalore airports, manages $1.3 billion.
Renuka Ramnath, who quit as the managing director and chief executive of of ICICI Venture in April this year, drew a pay of around Rs1.78 crore in the fiscal year gone by. In her nine-year tenure at the firm, Ramnath invested at least Rs800 crore and is believed to have returned close to Rs1,500 crore to the parent company, ICICI Bank Ltd, and about Rs1,800 crore to the firm’s LPs.
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First Published: Mon, Aug 17 2009. 11 02 PM IST