S3 E5: “PAYING FOR GOOD” PODCAST ON ‘Pay in the Private Equity space’ with Delilah Rothenberg, Founder of the Predistribution Initiative

“Value creation or value extraction?”

18th FEBRUARY 2021

On my ‘PAYING FOR GOOD’ podcast, we explain how Responsible Reward, the integration of remuneration and sustainability, supports the UN Sustainable Development Goals, which include Goal 10: ‘Reduced inequalities’.

This week we’re turning our attention to the world of private equity. These organisations pool investments from high-net-worth individuals, pension funds, sovereign wealth funds, banks, insurance companies and other investors. So it’s likely that some of your private and pension savings are invested in multi-billion dollar private equity funds.

Private equity firms then buy all or part of private companies, exert control over them through board directorships and make operational improvements. There are concerns that these improvements may, in some cases, increase profitability at the expense of the quality of jobs, pay and benefits in the portfolio companies.

Hence the question: are private equity firms creating or extracting value?

Usually, they are themselves privately owned, and therefore corporate governance requirements and remuneration disclosure are limited. However, it is possible to catch a glimpse of the compensation levels in the annual reports of those private equity firms that are publicly listed and $100 million pay-outs to fund managers are not uncommon. They, in turn, drive up the demand for assets such as land and property, and a proportion of the population becomes priced out and no longer able to afford them.

When you listen to our podcast guest, Delilah Rothenberg, founder of the Predistribution Initiative, you will learn about:
• how private equity fund managers’ compensation is structured: an often uncapped c.2% annual management fee and a c.20% carried interest performance fee calculated on the profit of multi-billion dollar funds upon exit
• the internal pay disparity between fund managers and analysts within private equity firms themselves
• the external pay inequity with the portfolio companies’ employees, who increase the value of the investment and yet may not reap the benefits.

In a world where the demand for socially responsible investments is on the rise and vast pay disparities are frowned upon, how do these self-perpetuating compensation structures by self-professed responsible investors actually support the UN Sustainable Development Goal of reducing inequalities?

Your action takeaway from Delilah:
• responsible private equity firms to practise what they preach by setting up profit share and equity ownership plans in their portfolio companies so that all employees can benefit from the value they generate
• private and institutional investors to demand more transparency on private equity compensation structures as part of their due diligence process. This is a very important point that we’ve made on previous podcast episodes.

As always, if you have any questions on the topic of Responsible Reward, feel free to email me at client.care@peoplenet.ltd.uk or book an introductory call here.