PE companies resort to salary freeze

With declining returns,about 38 pct of PE firms have implemented a salary freeze.

As many as six out of every 10 private equity companies have either frozen salaries of employees or are mulling to do so in near future as investments take a hit amid lower returns,says a study.

With the declining returns from private equity investments,about 38 per cent of PE firms have already implemented a salary freeze and a further 22 per cent of the firms are considering a freeze,according to Preqin survey.

“The large proportion of PE firms implementing base salary freezes or cutting base salaries is reflective of the performance of private equity funds over the last year,” said Sam Meakin,the managing editor of the survey.

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SMC Capitals Equity Head Jagannadham Thunuguntla said: “The enthusiasm that was there among the PE firms two years back is subsiding. They are gradually resorting to low premium model of operation to cut down costs.”

According to the 2010 Preqin Private Equity Compensation and Employment Review,”14 per cent of the PE firms have reduced the number of staffers and a further 12 per cent are considering this course of action.”

With the freezing of the salary,the firms are also reining in the bonuses paid to their employees,with nearly half of the firms reported a decrease in bonus payouts.

“Salaries in PE firms are always handsome has they operate with fewer number of staff. To cut down on employee costs they are either freezing recruitment or resorting to base salary cuts,” Thunuguntla noted.

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However,experts are hopeful that going ahead the salary cuts would be less as returns from investments would rise.

“With returns likely to move back into positive territory next year,we are likely to see fewer firms implementing base salary freezes and cutting base salaries than this year,” Meakin said.

Thunuguntla said: “In the coming one or two years there are a host of exits lined up. Usually bonuses are linked to PE exits,so payouts may increase in the coming years.”

The survey,which was conducted on 50 PE firms,buyouts and venture capital,found that buyout and venture funds gave negative returns at the end of March 31,2009.

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At the end of March 31,2009,buyout funds and venture funds gave a return of -33.8 per cent and -17.1 per cent respectively.

The survey found that the smallest group of firms have,on average,one employee for every USD 7.7 million in total assets,whilst firms with USD 10 billion or more in total assets have one employee for every USD 100 million managed.

“The average total remuneration for a managing general partner of a private equity firm in the smallest size group in our sample earns USD 1.4 million per year,while this figure increases to USD 5.1 million for those in the largest size group,” Preqin said.