SPEAKER_00 0:03

The OneSearch Podcast. Insights and opinions on the subjects that matter. In global infrastructure, financing and investment. With the OneSearch Credit Practice.

SPEAKER_03 0:20

Welcome to the inaugural OneSearch podcast. The first in what we hope will be a very successful and informative series covering a variety of issues across the infrastructure investment space and specifically for us here in the OneSearch Credit Practice, the most diverse credit practice in recruitment globally. And I'll introduce you to the diverse members of the team in just a moment. But we hope this will be a very informative series of podcasts recording here, the first podcast on Tuesday, the 9th of March, 2021. I am joined by two of the practice today. Juice Pina in uh New York. We call her G. Hi, G.

SPEAKER_02 1:05

Hello, how are you?

SPEAKER_03 1:07

And Namisha over in London. Hey, Nami.

SPEAKER_01 1:10

Hey Dan.

SPEAKER_03 1:11

Mercedes Perez doesn't join us today, but she's going to be on the next podcast. We're a flexible business. Mercedes has got some uh other matters to attend to today, but she will come storming in to the next uh podcast in style, I've got no doubt. So, why are we recording these podcasts? The first series of our podcasts is around compensation in the infrastructure debt space. And why are we doing this? First and foremost, we're asked regularly to provide comp data, but it's a very, very complex scenario. It just cannot be condensed into a table uh or a graph. That doesn't stop uh certain other people condensing it into tables and graphs, and we see every year certain uh people, uh uh entities produce and publish just very, very simplistic grids, which frankly uh make me very angry every time I see them and try and control my blood pressure when I see these things because they're just so broad and so vague as to be frankly irrelevant. However, when I when I've tried to to counteract this in the past, and I've written huge lengthy tomes, which sadly I think when you when you Google search project finance salary surveys or infra infrared salary survey, still my 2017 and 2018 war and peace like novels on uh on salary survey are the top results on that search, which is it's kind of sad. It's three years on, things have moved on, and uh it's difficult to write those huge uh essays on what are the complexities, what are the mechanisms by which compensation differs so much from one pocket of the market to another. So that's what this uh series of podcasts is about. It's about the OneSearch credit team talking around the market, talking around issues in the market, and trying to dispel some of the disinformation uh that we see and that we see uh perpetuated by these grid publishers out there in the uh in the recruitment world, the uh you know, the sort of misinformation, almost as if the Russians might be behind it, the sort of rumors that are in the market. We're here to uh give you some uh good referenced information. If you are an organization uh looking to uh make sure that you're in line with competitors in the market, if you are an individual in the market looking to get some referenceability across your peer group, then hopefully this will be of interest to you. So we'll start with the uh the more senior uh levels. Uh, as we go through the series of podcasts, we're gonna first of all focus on the MD through director sort of banding of seniority. And then later on we'll move down into the VP bracket, the mid-level bracket, and then on to the juniors, dentalists and associates after that. We will take, bearing in mind we're focused on infrastructure debt, which, you know, is all born out of project finance. We will take the banks as our, you know, if this was a science experiment, we'll take the the banks as our control, those project finance institutions who've been around for many, many years and whom OneSearch have have served for many years, and people in many cases we consider our friends and clients. And then we will move into and talk about the debt funds, institutional investors that have come uh certainly over the last eight or nine years very, very strongly into view. And and we'll talk about how compensation differs between the two different groups. We'll also talk about compensation across investment teams versus asset management versus investor relations fundraising and all the other uh relevant areas of those uh of those types of businesses. So I think the first issue that needs to be talked about whenever we talk about senior level compensation is Carrie. And this is something that you won't see in the in the grids if you go and consult the the certainly the the infradebt salary surveys that are out there. Very few, if any, I don't think I've seen a single one that even mentions Carrie. It's almost as if it doesn't exist. I can understand why that would be the case historically. It never really did exist. Infradebt funds, in my experience, have always been businesses that would largely mirror the activities of project finance banks. They would be in inter senior debt, they would be fairly low interest, fairly safe and stable investments over the long term, with a frankly an interest rate-driven return, and very little opportunity for the uh for the lender to add any any value over and above that. And the sorts of institutions that were uh setting up and running these infradebt funds didn't pay Carrie, partly for those reasons, maybe also because it's not part of our um you know remuneration culture. But that's very different to the to the situation that we see today. Isn't that right, G? I mean, tell us what are you seeing as a specialist in the infrastructure credit market in in America? What are you seeing?

SPEAKER_02 6:55

Yeah, something very different. Um there's I have to agree with you. I think as we speak to candidates, not everyone immediately thinks, oh, a credit institution will provide carry. That's usually more on the private equity side, but there's been a big change, especially because historically, like you said, there's been a lot of these credit funds focus on senior debt, but for two reasons. It's there's been a big change, and I'm sure Namisha's seeing the same thing. One thing is a lot of our clients, um, these credit institutions are moving away from the senior debt strategy and moving into mezzanine debt, which has similarities to private equity, though it's they are able to provide a carry component. Another reason that we're seeing it is, well, this is a trend that's been happening for years. These institutional investors, private equity firms in the real asset space that didn't have a credit team, a credit strategy, have now built that out. And there's numerous examples of that. Due to that, we also see that these institutions do provide a carry component. So, you know, now we definitely see more than before. But I have to say that if we fast forward maybe five or ten years, we're gonna see a lot more credit funds with carry components, which is attractive.

SPEAKER_03 8:12

Interesting. Look, that's uh indeed a real shift in the market from certainly the one that I knew back in the day. And look, I agree that is the that's very much the direction of travel. Mamisha, uh uh uh based in London, leaving the credit practice over there, what do you think?

SPEAKER_01 8:29

Yeah, very much of the same. I wouldn't say currently speaking, right now, there are many institutions that have um a carry element, but as G rightly said, I think it's something that we're going to see a lot over the next few years as these businesses start competing in the MesDET space. Um, in order to be competitive, they're going to have to introduce this carry element um in order to attract the best people and also to retain them. Because I think that's a massive point in terms of carry. You look at the the institutions that do have carry and you never see people leaving the the institutions because they have a huge, that's a huge retention team for them that is just not competitive in the rest of the market with other institutions.

SPEAKER_03 9:16

Well, depending on performance, right? I mean, I think it's always the sign if you have someone who you know is uh has a carry allocation and they are prepared to leave, it's usually a good sign from our perspective, isn't it, that maybe uh things are not going too well.

SPEAKER_01 9:30

Yeah, exactly. Exactly.

SPEAKER_03 9:32

With those investments. Look, it's interesting because a lot of the businesses that are established in the infrastructure debt world right now that don't have carry as a mechanism, as a way of paying their people, we're seeing some of those, aren't we, moving from a senior debt focus, trying to now establish themselves into the higher risk, higher reward mezzanine pocket of the market. What do you think, uh, Namisha, the the risks are for those businesses if they do successfully break into that space but don't adapt to pay their people via carry?

SPEAKER_01 10:12

They're simply just not going to be competitive in the market because you you're comparing yourselves with other structures out there or businesses, should I say, that are focused within the MesDeck space and that carry element is part of their part of their blood, should we say, within the institution. That's that's a massive part and can make a huge, huge difference um in terms of how they're compensated. It's not a difference of kind of 50,000 to 100,000. Um, we're talking in in the millions, um, if performance is obviously good. So therefore, that there is just kind of no competitive advantage if you're not going to introduce that, especially with the risk that um you're taking.

SPEAKER_03 10:57

So carry allocations and schemes vary, of course, but Nimisha can't name names, but but absolutely I agree. The these are life-changing sums of money that that we've seen in the cases of investors who've done a great job and deservedly added value, made their LPs very happy, and come off the back end of a fund life cycle with a check for multiple millions of pounds or dollars or any other currency you care to name. So the I I think we could be heading to a market with great disparity with several competing entities in the mezzanine debt area, but some of those businesses are giving their people access to to participate in the value they create, and other institutions not doing so. And it's not it's not a gap that can be bridged by bonuses. I mean, they'd have to be pretty colossal annual bonuses to even come close. So that's something that we've identified. Um I'm now going to, and hopefully this is going to be a theme through our podcast. Uh, we're gonna we're gonna dial up various friends of of ours and of the firm and get their view. Let's call Tom Murray from iSquared, who's gone to iSquared just over a year ago from Apollo to help them build out and is responsible for building out globally their infrastructure credit practice. You may well be aware, the listeners may well be aware uh of the progress that Tom's been making. There's been some noise in the press about that. It all sounds very, very positive. But I'm really keen to get Tom's views on Carrie as a payment mechanism within infrastructure credit. So, for the first time, people in you know, in the infrared world are seeing this carry mechanism, and people just want to hear from people like yourself within the market who get it, who are uh actually building businesses, employing Carrie as a compensation tool, and they just want to understand it. Um, just to understand what's how does it work, what are the ups and downs of it? Should people be aspiring to get a job with Carrie, or is it look, is are you better off just getting your base salary and your bonus?

SPEAKER_04 13:12

Yeah, it's a good question. So, look, I mean, I would take just taking a step back, um, Carrie is a is a form of compensation for you know overperformance, right? It's like getting a bonus when you achieve more than is expected of you. And and it really, number one, you know, you have to have the opportunity to be able to overperform. Some jobs you you know, you're expected to do what you're expected to do, and they don't really want you to do much more. So if you look at some of the funds out there that charge fees only, their job is really to accumulate AUM in transactions where you know they're pre-packaged, and you know, their job is to select the best ones, of course, and ideally outperform an index. But for that, you know, in general, Carrie is is is not really that relevant. They're they're asset accumulators, they're not really, there's really not an opportunity to create value. When you when you move down the capital stack or you move into more structured type financings, then carry becomes much more relevant. And as an LP, you want to incentivize your investor, right, your GP to go out and outperform. So you want them to do the extra work of the diligence, you want them to structure the best deal possible. You know, if, for example, if we can get warrants in a deal, you want us to be incented to do that in order to uh to maximize the return for the LP, and then they share some of that with us. So that's why Carrie exists, that's why it exists in private equity first, and that's why it's uh morphed into private credit, but typically on the higher yielding side where the asset manager actually can add some value. Now, if you think about a job um in an institution like ours, you know, Carrie is an important component of our overall compensation as a firm. Again, our LPs don't want to pay us for just getting deals done. They want to pay us to maximize value for them. And as a result of that, given that we are not going to be able to just charge fees to the levels that we want, we're gonna have to take part of our compensation in the form of carry. The opportunity for for an investment professional is that you know, carry can be very attractive if you perform. Now, in infracred, as an example, there are different ways that carry gets paid out, but in infracred, it's typically back-ended. So the LPs give you the money, you invest it on their behalf, you collect your interest and principal and fees and other aspects of your return. You ultimately get all of your money back with those returns. And when the last investment has paid off, then you know exactly whether you created value or not, and that's where the carry gets paid out. And it's typically, you know, a payment, one-time payment that can be very, very attractive to uh to you as a uh as an employee. So carry is definitely something that you know is is a wealth creation mechanism for uh for you know uh professional investors, but it's also something that you have to be very confident in your abilities to manage risk, not just put on risk, but to manage risk and to uh control as much as you can uh the outcome of your investments. Uh and if you can do a good job, then you know you can get paid very well.

SPEAKER_03 16:37

Absolutely. It strikes me, Tom. I obviously talk to a lot of bankers who say, I want to go to the buy side and I want to go and work for a credit fund. But these guys are used to working on such a short-termist year-by-year bonus cycle where really all they're focused on is how many deals can we get done this year, how much capital can we get deployed, and therefore, what might my bonus be? They're not necessarily looking at deals through a longer-term lens, thinking, will this deal stand the test of time? Will it be getting restructured in a couple of years' time, by which time they've moved on? Is it fair to say that um this carry model, this long-term model, is it is ultimately about backing yourself that you can do a good job in the long term. And when your investors look at that deal, as you say, upon exit, then we can all look around the room and say, yes, that was a great deal. Here's your long-term reward for it.

SPEAKER_04 17:35

Absolutely. Yeah, I mean, the problem with a bank model, whether it's lending or, you know, um investment banking generally, but you know, on the investment banking side, your job is really the sell side. You're moving product, right? So you're you're bringing the deal in, you're structuring it, and then you're selling it to someone else. And the idea is that the more you can do that, the more fees you can generate, therefore the better, the more compensation you can achieve. Commercial banks have kind of taken on that view as well, that you know, historically, anyway, that I have my front office guys, they're gonna do that, um, but they're gonna put some of it on our books, but really it's my credit guys who are gonna stop them from doing bad deals. So I can't compensate them uh for you know just putting deals on the boats. And of course, if things go materially bad, then I'll fire them. But for the most part, you know, their job is to put AUM on the boats. On the buy side, your job is really to make to deploy capital and make a strong, you know, call it a superior risk adjusted return. And you know, you only get compensated really if you if you achieve that. So assumed enough, right? And I think personally, I think that is a better model than than the prior, you know, than you know what banks do. But I but I also think that the banks have kind of figured that out post-global financial crisis, and they have come up with things like deferred compensation. So you do get a bonus, but you only get so much of it in cash. Part of it is in the form of stock or other kind of deferred comp and you have to perform. So it's going in that direction. I think the the concept of carry though in private equity has been around forever, and you know, it is the right, it is the right alignment of interest.

SPEAKER_03 19:14

Well, are there any circumstances where you think it might not be? I mean, I see other credit funds who still don't operate a carry model, and maybe they attract people again with that shorter termist viewpoint. Do you know do you see a halfway uh hybrid model that can work where there's some uh mechanism to release capital to successful employees earlier but still retain some element of carry? Or are you a carry or bust man?

SPEAKER_04 19:45

No, no, I think I think there has to be cash compensation for people to be able to live and perform their duties, um uh pay their bills. Uh, but I do think that the um the back end carry is really kind of where one should um generate their wealth. I think in general, carry makes a lot of sense, like I said, where you can uh where the investment professional can um influence the outcome significantly. I think if it's something where, you know, look, you're being asked to go out and buy a portfolio of existing deals or you know, whether it's in the primary market or secondary market, I think the carry component becomes probably a little less relevant because although you're still you still have to pick and choose the right deals, right? But if you're being asked to perform against an index, are you gonna overperform the index? And you know, at some point there's just not enough value, even if you overperform by a little bit, because in the most part you're gonna sort of perform around where the index is in the long run. There's just not enough juice in that type of strategy to incent people to be around for eight, ten years. The other thing is those are syndicated transactions. A lot of times they're they're um they're uh they're liquid. And so you know you can mark the market those deals and you can see very quickly whether you whether you you know you you are right or wrong. Um, you can also liquidate those positions. So I mean to me, Carrie is much more also associated with with illiquidity, so where you put risk on the books and you really don't have an avenue to exit that or to really mark the market that in a in a sort of you know market uh based way uh or market verified way. And and that's where that's where I think it makes sense. So does it make sense for all fixed income strategies? Definitely not, in my opinion. But definitely for those with higher yields, less liquidity, more complexity, where there's a lot more work being done to originate the right deal, structure, uh, underwrite, execute, and then monitor, um, that's where you know really carry should be heavily um heavily used.

SPEAKER_03 21:55

Tom, that's awesome. I think you've covered everything that's okay. Need. I mean, um, and um there's just well, there's everything we need and more in in that. I really appreciate it. So, some interesting insights there from Tom Murray, uh, and hopefully they you know provide some colour to this changing landscape that we see within infrastructure debt compensation. Just to wrap up for today's uh podcast, Gee, what difference do you see with institutions who do award carry to their senior people? Does that then have a knock-on effect when it comes to the annual cash compensation that's awarded?

SPEAKER_02 22:33

Yeah, I I would say so. We work with a couple of different credit funds that provide carry. And I would say that it's definitely structured differently, the cash comp. It's either one that I haven't seen before, which was new to me, is a very lucrative base, no bonus. Um, and that would include the carry component, which listen, if they go there, they do well. That's like you guys had mentioned before, it's very attractive, or a higher base lower bonus, also knowing that you would be getting that carry component. So I I would say, at least from what I've been seeing, a lot of the clients that I work with that have that carry element, they are more attractive on the compensation end.

SPEAKER_03 23:16

Okay, and in the next podcast, we're gonna get into the numbers. We're gonna start to talk about actual numbers when it comes to uh MDs and uh you know, maybe more senior directors. Today's podcast is just an intro and to talk about the the the carry component. But look, that's very interesting, G. And and Namisha, do you are you seeing the same in the European market?

SPEAKER_01 23:37

Yeah, very much so. I'd say what what's quite interesting as well is that carry is is for juniors as well as for seniors. And and I don't know whether that's kind of everyone's actually aware of that. Um, with with the fund we've been working with, just a paste and associate, so three years of experience, and that they will get carry, they will be entitled to carry once their notice uh not notice period, once their probation period is over. So three months into their employment, um, they will start start earning carry. Um, but yeah, pretty much seeing the same as G. Um at the junior end, I think, slightly more competitive on Cash Comp. Um, perhaps at the senior end, more so kind of competitive on the base, but not so much on the bonus, because they then have that carry element um which which can be very sizable.

SPEAKER_03 24:25

That look, that's a really interesting point on on more junior team members being awarded carry, I think, as a retention tool, because we know just I mean, we'll come on to that later in the series, right? But in terms of how competitive that junior recruitment market is, I mean, it's brutal. And if you've got if there is a mechanism that you know whereby uh a more junior team member thinks I better not leave. This is this could be I could be sitting on a gold mine here, then I think that's that's it's a very smart move, frankly. And it really aligns the whole team, doesn't it? That they all feel we're really in this together. If this investment goes really well, we all do well. We're in this with the LPs. That's what um that's what really strikes me. Um good, okay. Well, look, thank you very much, uh ladies, and uh I hope that's been informative for the listener. We'll see you on the next podcast.

SPEAKER_00 25:18

For more information on any of today's topics, or to contact the OneSearch team, please email the OneSearch Podcast at podcast at one-search dot com.