The ‘Golden Handcuffs’ Are Off: Private-Equity Employees Leave for Smaller Firms

by Miriam Gottfried

A job at a big private-equity firm was once a ticket to lifelong riches. Now employees tired of waiting for payouts are leaving for jobs at smaller shops.

Usually, the bigger the private-equity firm, the bigger the payday. But with the industry struggling to profitably unload companies, many employees are heading for the exits, opting for jobs at smaller firms where they are betting they will be able to earn more.

A key form of compensation is driving the moves, with midlevel employees at big prestigious firms leaving potential paydays worth millions of dollars on the table. They are worried about when and if their carried interest, or “carry”—pay tied to the performance of their deals—will materialize.

“The golden handcuffs aren’t so golden anymore,” said Stephanie Geveda, who previously oversaw business-services investing at private-equity firm Warburg Pincus. “Top talent is doing the math and realizing that a piece of a smaller fund that actually performs beats a theoretical windfall that may never materialize.”

Geveda, who founded Coalesce Capital in 2023, said she interviewed 500 candidates for 23 roles over the past couple of years. She has nabbed people who worked at Blackstone and TPG, among others.

A similar uptick in talent mobility took place when fund performance suffered after the 2008-09 financial crisis, recruiters say. Many people who are leaders at the biggest firms today left jobs at that time to join their current firm.

Funds have different rules around when carry is paid, but the timing of portfolio company sales is a factor. Those have been lagging since the Federal Reserve’s move to raise interest rates in 2022, which made it harder to profitably sell companies that had been purchased when rates were lower.

One vice president who left a job this spring at a big firm to go to a small, sector-focused firm said he left in part because he was losing confidence that his carry would ever materialize. Eventually, it got to the point where his uncertainty about receiving it outweighed the amount he stood to earn, he said. Private-equity employees used to aspire to own their own jets, but now they just want to be able to afford their kids’ private-school tuition, he said.

“When people’s perceived value of their carry goes down, mobility goes up,” said Hugh MacArthur, chairman of the global private-equity practice at consulting firm Bain & Co.

Big firms argue that their expansion into new business lines and geographies has created opportunities for midlevel people to advance. Their sprawling nature and ability to tap new markets also means the biggest ones are raising much of the industry’s new capital.

At least on paper, pay is also better at bigger funds. At funds worth $10 billion or more, principals in the top pay quartile made at least $955,000 in base and bonus in 2023, according to an annual survey by recruiter Heidrick & Struggles. At funds worth $750 million to $999 million, pay for the top quartile was at least $600,000.

Employees at bigger funds also stood to earn potentially far more in carry, which refers to the portion of the fund’s profit—typically 20%—that goes to managers. But there are several reasons that potential carry might not be fully realized.

A fund might fail to clear the minimum annualized return threshold, known as a hurdle rate. Employees also could leave before their promised carry vests, a process that can take six to eight years or more. Carry that has vested can be unvested if someone goes to a competitor. And carry that has been paid out can be clawed back if fund performance starts to suffer.

There have been recent instances where people left behind seven to eight figures worth of potential carry for a firm that has a better trajectory, said Jonathan Goldstein, regional managing partner of the Americas private-equity practice at Heidrick.

Smaller funds can have higher returns. Top-performing small funds significantly outperform top-performing big ones, according to data from Cambridge Associates. That can make a difference when it comes to the actual amount of carried interest someone receives.

Beyond the uncertain prospects for carry, vice presidents and principals at big firms have little chance of reaching the top, recruiters and hiring managers say. Senior people tend to stick around, leaving less room for younger staffers with talent and ambition to rise.

Even for someone with impeccable credentials—an analyst job at Goldman Sachs, followed by a Wharton M.B.A. and a job at KKR or Blackstone—career momentum can stall out, investment professionals say. The lack of a clear line of sight to partnership is making them more likely to move on.

Not all small firms can attract top talent. Institutional investors such as pension funds are increasingly reluctant to back generalist firms, often categorized as “jambog,” which stands for “just another middle-market buyout group.” Some employees are also leaving such firms over fear about their ability to raise funds in the future, recruiters say.

Focused startups can offer an attractive alternative. Midlevel employees at such firms can have more say in the investing process and get a bigger share of carry or even a stake in the management company. Both could potentially be worth much more than cash compensation over time.

Jo Natauri, a Goldman Sachs veteran, founded healthcare investment firm Invidia Capital Management last year. She hired people from KKR and Partners Group, among others.

Natauri said she made a point of being generous with carry.

“The carry looks nonexistent at a lot of funds right now,” she said. “If you leave, you’re not leaving too much on the table.”