Private equity giants have given momentum makers new incentives to generate cash returns during a deal drought.
Carlyle Group Inc. last week followed the lead of larger rivals KKR & Co. and Apollo Global Management Inc. in aligning the pay of dealmakers and senior employees more closely with investment results. closely connected.
These companies will transfer a portion of employee fee income from assets under management to shareholders who value predictable profits. They are adjusting their compensation formulas to enhance the maker’s focus on creating returns.
This trade-off means dealmakers will earn more in good times and be hit harder in tough times.
Bloomberg calculations show Carlyle and KKR employees would have earned about $170 million less last year if the changes had been in place. Total compensation will increase by approximately $300 million in 2021 and 2022.
The change in pay reflects the balancing act private equity firms face as they transform into large public companies. Their leaders must keep dealmakers focused on huge returns while satisfying shareholders’ desire for steady profits and stock dividends.
Both Carlyle and KKR said the changes are expected to keep pay pools unchanged over time, and a Carlyle spokesman said the company was methodically rolling out changes already underway across the industry.
“This is not about changing overall compensation levels,” John Redett, Carlyle’s new finance chief, told analysts. It’s about getting higher pay that’s performance-driven, he said.
These moves make profits from shareholders to employees more volatile.
Bloomberg estimates that if Carlyle’s new compensation system had been rolled out a few years ago, employees would have earned about $190 million more in 2021 (about an 8% increase) and about $40 million more in 2022 (about a 2% increase). . KKR employees will earn an additional $20 million, or 1% of salary, in 2021.play video
At the same time, total employee wages will fall by more than 5% at every company by 2023.
If the changes bring more pain during tough times like last year, the companies could be at risk of talented dealmakers leaving. When borrowing costs rise in 2023, dealmakers’ returns are low and few buyers are willing to bet on them. U.S. private equity deals fell to their lowest level since 2016, according to data provider PitchBook.
If deals pick up this year, the compensation changes will ultimately lead to bigger paydays. Private equity firms are betting the Federal Reserve will shift to interest rate cuts in 2024, which could ease a deal slowdown and deliver investment returns.