January 8, 2014
Interviewed by: Privcap
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Carry, Compensation and Careers

Sonny Kalsi of GreenOak Real Estate, Jennifer Novack of Sousou Partners and Susan Swanezy of Hodes Weill & Associates discuss the challenges of current compensation and back-ended, portfolio carries interest and how executives need to focus on retention issues among junior staff as much as senior ones.

Sonny Kalsi of GreenOak Real Estate, Jennifer Novack of Sousou Partners and Susan Swanezy of Hodes Weill & Associates discuss the challenges of current compensation and back-ended, portfolio carries interest and how executives need to focus on retention issues among junior staff as much as senior ones.

Carry, Compensation and Careers

With Sonny Kalsi of GreenOak Real Estate, Jennifer Novack of Sousou Partners and Susan Swanezy of Hodes Weill & Associates

Zoe Hughes, PrivcapRE:

I’m joined today by Susan Swanezy of Hodes, Weile and Associates, Jennifer Novak from Sousou Partners and Sonny Kalsi from GreenOak Real Estate. Welcome and thank you for joining me.

Susan Swanezy, Hodes Weill & Associates:

Thank you.

Jennifer Novack, Sousou Partners:

Thank you.

Hughes: As we look at the jobs landscape and career progression within private equity real estate, I think one of the biggest challenges, not just for those perhaps mid to later stage in their careers, but it’s also for the firms themselves, it’s really how you progress your career, how you actually retain talent within a firm. Jennifer I want to open up with you. As people move through their careers how are they actually underwriting the opportunities? What are they really looking for in a prospective employer?

Novack: Great question. What’s interesting is I think people are very much opportunity focused versus purely compensation focused right now. They’ll actually do quite a lot of due diligence on the firms that they are interviewing with. Obviously, those firms are interviewing them and doing the same, but we’ll find even at the junior level, they’ll be asking a lot of questions about capital raising, or strategy etc., which I’m not sure happened ten years ago.

It’s not an assumption that every firm will still be around in five years and will be doing well or that they’re busy etc. Assuming that people have the choice and they can choose between different firms, I think they’re looking for places that are active, that are well capitalized. I don’t think it’s a “one-size fits all” in terms of everybody wanting to work at the largest, most well capitalized firm. Some people are really drawn to being close to the assets.

For the most part, I’d say that they’re looking for a place they could see themselves at for five years and will be around in five years and where they can rise up the ladder.

Hughes: Is it more becoming a point of the financial world, being of the GP and also the LP, when they’re kind of looking to recruit, are the prospective employers looking at the financial underwriting of the GP?

Novack: I think that people are trying to assess stability and that comes in different forms. They’re also trying to assess mentorship, so I don’t think people need to be super well capitalized for it to be a compelling opportunity.

Swanezy: I think it’s also hard for a candidate who is coming up to sort of be able to evaluate the financial well-being of a private company. It’s so influenced by reputation and deal flow, so to the extent that you’re in the market, you’re actively transacting, buying, selling etc. That’s what people are going to relate to. It’s going to be very hard. Now, if you were talking about institutional investors focusing on the well-being, they’re in a different position to be able to evaluate that from. They are very focused on the financial well being of the GP but for somebody who is a mid level, they’re going to be asking their friends what the reputation is of the firm. They’re going to want to make sure that they’ve seen them actively bidding or transacting or whatever their core competency is, that they’re in the flow.

Hughes: There is a big crucial industry especially for the newer firms, which is actually how they retain talent. How do you actually do that today? Susan, I put it up to you. Is it all about compensation or are there other factors that play a part?

Swanezy: Oh absolutely not. Jennifer just mentioned it earlier. I think it’s about quality of the opportunity, so to the extent that you’re working on interesting matters and that you see growth potential for yourself and for the firm then I think that makes it a compelling opportunity. When we’re talking to people about joining, what we say and what we believe is that it’s about the people. You really want to be with people that you like being with since it’s 80 percent of your life with these people. You can learn from them, they’re good to hang out with, they’re good people of integrity. People, quality of the work, that you’re exposed to interesting maters and as I said earlier, we meet with 200 different managers a year, so there is a lot of exposure to different strategies and opportunities.

Then, we also sell that we don’t have the “mothership” factor. We don’t have the 40,000 emails that are just nonsense. There are just fewer distractions and you know what we’re talking about, right? There are just fewer distractions and not having the overhead of a big major global investment bank behind you.

Hughes: Compensation is a factor in terms of retaining talent and we have seen that shift from the deal-by-deal carry test down to the portfolio test. What impact does that have for GreenOak particularly for retaining the junior members of staff who it does impact financially?

Sonny Kalsi, GreenOak Real Estate:

That’s a big impact and it’s funny because I’m not sure that consultants or the LPs really appreciate the big impact that it has. The reason they do it is for alignment. The reasons are all very good and it makes sense but when you take that and then you layer it on upon a younger organization that doesn’t have 20 years worth of AUM to pay huge management fees, to then be paying the teams very well from a salary standpoint. It puts a lot of pressure on them, to wait five or seven years when people are at that point in their career where they’re getting married, they’ve having children, they’re trying to buy a place, they’re trying to pay for private school education, they’re trying to do all that stuff, it’s really hard.

It’s particularly acute for us because my team reminds me constantly we are not leading the way in terms of cash compensation. What I wanted is a team that’s very entrepreneurial, and so we share ownership of the business much more broadly than I think a lot of people do in our industry. Very much so, I think the average person on my team is probably on the low end of the range on cash compensation but way off the charts on the top in terms of carried participation. That’s great, except when you’re in a pool to promote and it is back-end weighted and they’re waiting that much longer for it.

Hughes: How do you begin to mitigate that yourself?

Kalsi: We’ve done things like make personal loans to people if they’ve got a big cash need, if they need to do something. As I said before, we’re subsidizing current cash compensation, which is above and beyond what the business itself would produce just on asset management fees. We, the partners, are doing it ourselves to retain our best people.

Swanezy: What we’ve seen and the managers that we speak with have these challenges as well. There is, for some, even some of larger, more established managers, there is pressure on them that have bigger organizations and there is pressure on them to raise the larger funds because they need the fees to pay the mid-level people more in terms of current compensation.

I would say they get more of their compensation in bonus than they would have in the past because it’s just too long to wait for the carry. That doesn’t mean that there isn’t still alignment and carry is an important component, but there is pressure to pay these people more in terms of a current compensation basis. I think it’s especially hard for the guys and women that didn’t quite make it in the last downturn. They didn’t have that opportunity and yet they’re being promoted to partner. In some cases, it means a buy in and there is no visibility in the near term. We’ve seen some very good people in the mid-level leave to go out on their own because they don’t have the ability to wait five, seven, ten years for their big payday because they haven’t made it.

Hughes: Jennifer what are you seeing in terms of the carrier provisions? Is it having a real impact?

Novack: It is because I’d say about three years ago nobody was motivated by carry, they were so burned by what happened that they just said, “Give me as high a base salary as possible. I have zero trust in anything right now.” That’s actually shifted and all levels are asking to have some skin in the game. It’s actually great for employers because it aligns interests and it actually can amount to not a really high value in terms of what you’re actually granting, or giving, or people are buying into. The psychological shift is really huge, so that is definitely in favor again. Firms that can offer, -bad pun-, to compensate for lower cash compensation, I think it’s helpful.

Swanezy: Another thing that we find that we can compete pretty effectively with is we’re very transparent in how we compensate people. We have salary, bonus and a point system. You don’t have to wait until February to figure out that it’s going to be a big surprise. You can see that we’re pretty transparent about the revenues that we’re producing and we want people to be motivated. All the oars are working in the same direction. There are not a lot of secrets. You don’t know what everybody else has but you have an idea of what you can make and your ability to contribute to the bottom line and it makes a difference.

We can compete pretty effectively against investment banks who are paying their people in stock, paid out over several years and again, not a lot of clarity on what they’re going to get.

Kalsi: Well the Big Black Box, not knowing what you’re going to have under the Christmas tree until Christmas. That’s just how they work. I think then, in a lot of ways, Susan’s firm and my firm were created as the anti-investment banks, from a standpoint of transparency, team alignment and a lot of things. It definitely changed the pressure that it puts people under and what I’m hopeful of, is if we continue to do a good job and the world doesn’t blow up, that it’ll pay off for everyone long term.

Hughes: How else are you trying to create that team alignment? How far does it go beyond the compensation and what other structures are you putting in place, Sonny?

Kalsi: We do a couple of things. One, just on the compensation point, carried interest. Everyone participates in the same pool. We don’t post a list on the wall in terms of who’s got what, but it’s not a huge secret either. Rather than compensating people for the deals they’re doing, they have an ownership interest in the entire fund and it really aligns everyone to sit around the table and really focus on overall fund performance as opposed to their own deals.

The other thing that does though is it makes for very robust discussions about what deals we’re doing. Our investors always ask us about our investment committee process and all that and there are five of us that are on the investment committee, five that are the most senior partners and owners in the business. The question you should ask is the pre-investment committee discussion where the team gets around the table and beats each other up about the deals each of them is doing because they all own them. They all own them all together and it does a lot. It does a lot from that standpoint.

I care a lot about culture. I think part of the reason I stayed at my old firm as long as I did is we had a great culture in our group and we’ve been able to bring a lot of that over. If we hire someone and especially if they’re someone that doesn’t come from our past life, we torture them with all kinds of meetings and interviews and we have all kinds of these young guys have tests where they take them to a baseball game, they’ll take them to a concert, they want to see them in all kinds of different settings before we will hire them. We really want to know that it’ll, like Jennifer said, if we spend a lot of time together, that it’s going to fit and work under a lot of different circumstances.

Hughes: I know there was a recent survey that said the number two reason for joining a firm is career advancement but the primary reason, the number one reason for leaving is lack of career advancement. Jennifer if a fund is not growing in terms of size, how does someone actually get that career advancement? If it’s perhaps not one of the constantly growing funds, how did they progress?

Novack: They can have an open conversation with their manager and I think there is a way to do it in a positive, patient “start the dialogue, not the ultimatum” fashion. Talk to them openly about the future of the firm, what they’re seeing and I think one of the best things that firms can do either in a transition time, if there is a crisis, or if things are taking longer than expected to become big or successful is just to be as transparent as possible with all levels of the organization. The more time people spend wondering what’s going on, the less time they’re focusing on the job and as Susan said, they’re not all rowing in the same direction.

It actually goes a really long way when you take the time to sit down with people in the firm and explain where we are but this is what the vision is and this is how we’re getting there. They want to have faith in the leadership of the firm and then they’ll decide for themselves if they’re up for sticking around for that. That goes a long way and in terms of it being brought up by the employee, I think that you can be open about it in a nice way.

Hughes: Susan, it goes back to your point, the transparency. You don’t just need transparency with your investors but within the firm as well.

Swanezy: Absolutely. That also builds the trust and the confidence and I would say that the ability for advancement is really also a function of the manager’s ability of being creative, to be resourceful, to be flexible. We saw some of the best success stories of those managers that successfully transitioned from pre-global financial crisis to post-global financial crisis was taking over assets from weaker managers, bringing on a separate account if they were only doing funds but they brought on a separate account, doing more co-investing.

There are ways that you can get new avenues, new sources of revenue and that also has the benefit of giving your people more opportunities to work on different strategies and capital structures.

 

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