Skip to main content

When The Greener Pastures Are Paved With Private Equity Greenbacks

  • Author:
  • Updated:

It’s hard to throw a stone on Wall Street without hitting a senior investment banker who thinks the new kids these days are too much money. Just two weeks ago we saw John Whitehead, who was one of Goldman Sach’s co-heads exactly one billion years ago, griping about that he was “appalled at the salaries” on Wall Street. He had in mind more than just the junior bankers and newly recruited analysts—he even singled-out Goldman Sachs chief Lloyd Blankfein’s paycheck. But you don’t have to press to aim your tossed rocks very well to knock around a few grey-hairs covering the minds of those who think that salaries for associates are getting too high.
Not surprisingly, those on the receiving end of the "appalling" paychecks tend disagree. Fortunately for the youngsters, there are more places to take their finance degrees than ever before—and many of them hold out the promise of even more money to the next generation of would-be tycoons. Many recent graduates of some of the best finance programs look at Wall Street’s traditional investment banks more as finishing schools than as places to spend their careers.
Take “Fred”—the pseudonymous rising third-year featured in Liz Peek’s New York Sun column this morning. Fred is a top analyst at Lehman Brothers. You can tell he’s a top analyst because Fred’s been invited back for a third year at the firm, which means he is getting promoted upwards without going through the trouble of getting an MBA. He describes his work as “mind-numblingly boring.” And he’s leaving for greener—meaning, potentially more exciting and more lucrative—work in private equity.
It isn’t just the potential to make more money that is luring Fred away from Lehman. It’s also the transparency of how his new firm makes compensation decisions. The mysterious machinery of bonus decisions has long been a source of frustration on Wall Street. Exactly who gets what and why is often a mystery, fueling rumors of favoritism and envious speculation. It can even be more irksome for junior employees of Wall Street firms, who are often paid in lock-step with their peers regardless of personal or business group performance.
"The private equity guys tell us what they want and we do it," Fred tells Peek.
Indeed, contrary to the impressions given by headlines about bonuses and the gripes of retired bankers, these days Wall Street firms pay-out far less of a percentage of revenues to compensate their professionals. Last year, for instance, Goldman Sachs made news by handing out large bonuses but still managed to shrink its compensation costs to the lowest percentage of profits in recent memory. This is good news for shareholders but bad news from the perspective of the bankers who are doing the work generating those profits.
Perhaps even more troubling for traditional Wall Street firms is that they are losing some of their luster. There is widespread feeling that the last generation of tycoons has passed through the doors of the investment banks and that the next generation will arise elsewhere. A decade ago, investment bankers would describe themselves as the “hunters” of the tribe of finance, relegating the lawyers and others to the job “basket weavers.” But these days many Wall Street firms seem to be playing catch-up in a deal market whose biggest headlines are made by hedge funds and private equity firms, often serving in what are considered decidedly secondary roles by providing financing and bridge equity to deals cut by the new class of hunters.
“Whereas in the old days the investment bankers were the creative masterminds behind financial transactions, these days the intellectual baton has passed to the firms that are taking everlarger companies private at an accelerating pace. Investment bankers view themselves as necessary but not very exciting ingredients in the mix,” Peek writes.
Wall Street Adjusts as Top Hires Flee [New York Sun]