Last year, investment banks, private equity firms, and hedge funds rewrote the dealmaking record book. Deal volume, industry profits, and CEO bonuses all reached new heights (see BusinessWeek.com, 12/19/06, "Deals of the Year, in a Year of Deals").
Now the money is trickling down through the ranks of the financial-services industry. Bonuses, which were set last December, are typically paid out during January, February, and March. At many firms such as Goldman Sachs Group (GS) everyone from the secretary to the most senior partner is eligible to partake in the record payout. Goldman Chief Executive Lloyd Blankfein received a bonus of $53 million, a securities industry record. The average payout at Goldman was about $622,000.
The money is flooding into New York City, where financial services account for 5% of the jobs but 20% of total pay. Citywide, compensation in the financial-services sector hit a record $23.9 billion, up 17% from $20.5 billion in 2005, according to state officials. The average bonus in New York City's financial-services sector was $138,000, according to the New York state comptroller's office.
The average numbers mask where the real money is being made, though. Even midlevel investment bankers, hedge fund managers, and private equity investors are taking home huge pay checks. The average managing director, the investment banking industry term for partner, is earning an average of $1.8 million to $2 million, according to Gary Matus of executive search firm Egon Zehnder. Team leaders and other senior bankers are seeing average bonuses of $3.5 million to $4 million, and vice-chairmen and other superstar bankers are earning bonuses of $20 million or more, Matus said.
Those figures don't include the wealth created by the appreciation of stock that bankers hold in companies such as Goldman and Morgan Stanley (MS), which have shifted from a true partnership structure to one of public ownership. Lazard (LAZ) announced last November that it would sell an additional 12 million shares, 6 million of which are owned by senior members of the firm. Individual bankers made millions from the sale.
CEOs and senior executives at private equity firms and hedge funds can earn even more than investment bankers. "Investment management is the most lucrative profession in the world. There's nothing like it. Investment banking is a poor cousin to hedge fund investing," said one senior executive at a financial-services firm, who declined to be identified. He said the founder and CEO of a large hedge fund, such as Steven Cohen of SAC Capital Advisors, can earn hundreds of millions of dollars a year (see BusinessWeek.com, 7/21/03, "The Most Powerful Trader on Wall Street You've Never Heard Of"). Senior leadership at a large private equity firm can earn a comparable amount, according to Brian Korb, a partner with Glocap Search.
Behind the Bonuses
Pay is on the rise, especially for junior and midlevel investors and dealmakers. Investment banks had to quickly bolster their ranks after the stock market crash of 2000 and a subsequent period of layoffs. As deal volume picked up over the last two years, banks had to lure back junior people who also were courting offers from hedge funds and private equity firms. That forced investment banks to offer junior and midlevel employees bigger bonuses, Matus says.
Hedge funds and private equity firms have an urgent need for more talent. Blackstone and others are raising giant funds as large as $20 billion, enabling them to do more deals and larger transactions. "With more money and more deals comes the need for more people, and there's a shortage of top talent at most levels," says Korb. For example, dealmakers two years out of their MBA program can earn $400,000-plus a year in base salary and bonus, plus a share of company profits that can be worth much more, according to Glocap and Thomson Financial's (TOC) 2007 Private Equity Compensation Report. "Two or three years ago, it was closer to $300,000 to $325,000," Korb says.
Senior private equity players earn more. A vice-president three to five years out of business school can earn $400,000 to $650,000-plus in base and bonus, along with a multimillion-dollar share of profits. A partner can earn several million in base and bonus, plus millions more in profit sharing. The numbers tend to be larger at big firms.
It may seem pointless to keep score at that level, but hedge fund stars probably earn the most money of all. At 15 Central Park West, a new luxury condominium in New York City, the penthouse went to Daniel Loeb, the 44-year-old shareholder activist and CEO of $3.5 billion-plus hedge fund Third Point Management. He reportedly paid a city record of $45 million for the full-floor apartment. His neighbors at the new building include actor Denzel Washington, musician Sting, and Goldman Sachs' Blankfein, who reportedly paid $27 million for his apartment. That makes Loeb the king of the hill.
Can it last? Investment experts believe deal volume will be strong for the next several years, barring an unexpected downturn in the economy and capital markets or a geopolitical crisis. Goldman Sachs Chief Financial Officer David Viniar said the firm's backlog of investment banking deals is higher now than it was at the beginning of 2006, and that CEO confidence and the economic outlook remain solid. "Conditions should remain strong in 2007," he said. If that's the case, dealmakers and investment managers should benefit from a rising demand for their increasingly needed services.