(Bloomberg) — Private equity giants are giving campaigners 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 some of the employee fee income from managing assets 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.
read more: Private equity returns plummet to global financial crisis levels
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 pay,” John Redett, Carlyle’s new finance chief, told analysts. It’s about getting higher pay that’s performance-driven, he said.
fluctuation compensation
These moves make profits from shareholders to employees more volatile.
According to Bloomberg estimates, if Carlyle’s new salary system was launched a few years ago, employees’ income would increase by about $190 million (about 8%) in 2021 and about $40 million (about 2%) in 2022. KKR employees will earn an additional $20 million, or 1% of salary, in 2021.
play video
At the same time, total employee compensation will fall by more than 5% at each 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 fall to lowest level since 2016, According to data provider PitchBook.
If deals pick up this year, salary changes will ultimately lead to bigger paydays. Private equity firms are betting the Fed will shift to rate cuts in 2024, which could ease a deal slowdown and bring investment returns.
