EUROPE – Remuneration a hot topic

Kimberly
16 September 2009

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A central theme this morning at the Capital Creation event was remuneration: As bankers worldwide prepare for their compensation packages to shrink, many in the private equity industry are championing maintaining the high levels of salary and bonus paid to executives in the space. In some firms, where remuneration is below market rate, there are even calls to raise it so as to ensure the continuity of the teams.

"Poor performance absolutely affects team retention," said Peter McKellar, CIO of SL Private Equity. "Why hang around if there is no carry? Those in their early 30s have to look after their own careers, which makes LPs worry who will be left to look after the investments."

But Nordwind Capital's CEO Hans Albrecht was very outspoken about the need to keep remuneration low initially, with bumper rewards only paid out after long-term time horizons. "EUR 250,000-300,000 per head is sufficient to run a fund. They should make money at the end of the day, not now. LPs must not invest in funds where there is too little risk for the GPs." Albrecht added that he felt young professionals at firms should re-mortgage their homes to pay their portion of GP contributions if need be, as it demonstrates their true, long-term commitment to LPs.

Not all LPs are convinced by this, however. Rod Selkirk, now at Bridgepoint Development Capital but previously CEO of Hermes Private Equity, explained how this can actually be off-putting: "At Hermes, we once declined to invest in a fund where staff were expected to work six days a week and were only paid small bonuses, as the head believed in this long-term strategy. This should have been music to our ears as LPs, however we feared they would not be able to keep the team together. GP bosses must remember they are recruiting and retaining talent not just from within the private equity industry, but also the entire asset management area. If the economics seem better elsewhere, the talent will go there."

Albrecht had the last word: "I hope the regulators don't agree with that."