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01 Nov 2021

How to solve the irregular income challenge for private equity professionals

Private equity clients have unique financial needs. Here, Investec private banker Laura Parker discusses the common themes – and solutions that may help brokers add value.

For those working in the private equity industry, securing a mortgage or other lending can often be a challenge. Each year, Investec’s GP Trends survey explores the professional experiences and financial needs of those working in the sector and in 2021, 69% of UK respondents reported that financial organisations didn’t understand their income profile.

This can be because private equity professionals typically have an irregular income structure that can complicate affordability calculations. Therefore, brokers and lenders must work together and evaluate wealth and meet the needs of this high-net-worth client base.

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Brokers can add value by working with lenders that understand unique income profiles

Because of the nature of carry, a private equity professional’s income profile can be more complex than that of other financial professionals.

Recap: what does a fund lifecycle look like?

A private equity fund is formed by a group of investors who look for enterprise opportunities. The founders encourage other investors — including pension funds, individual investors, or other investment bodies — to contribute capital. These investors don’t directly control the fund but stand to benefit from its performance and are known as limited partners.

The founders of a fund will often put a large amount of their personal wealth into the fund, known as a co-investment, or co-invest. This is done to reassure the limited partners of their faith in the fund’s ability to generate returns, and forms the basis of any initial investment. Additional investors may join the fund, but money is generally invested over a long-period of time. If a fund is performing well after a specified period (usually five or ten years), it will start to sell its investments for a profit.

It is at this point that investors may start to realise wealth. Founders will increase the value of their initial investment if the fund was successful. Furthermore, they will also receive an additional payment, which is a proportion of the fund’s profits after other investors are given a return. This payment is known as carried interest or ‘carry’.

Because of the nature of carry, a private equity professional’s income profile can be more complex than that of other financial professionals.

What does a private equity professional’s income structure look like?

Carry is typically vested over a few years, and is received on top of annual bonuses and basic pay. In addition, some of this remuneration may be received in a foreign currency.

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Laura Parker, Private Banker, Investec

Assisting Private Equity clients is one of our core areas of expertise so we understand the unique nature of each firm and the pay structures involved. We’re able to look at total income and consider carry to help clients achieve their goals.

How can brokers can help private equity professionals?

Given the nature of a fund lifecycle and the personal income structure of its investors, there are two main mortgage-related factors for brokers to consider.

Firstly, mortgages will often need to be bespoke. Brokers should look to work with a lender that can take into account co-investment, carry and bonuses when calculating affordability and tailor a repayment plan accordingly.

Laura Parker, a Private Banker at Investec explains: “Over the last year the majority of requests from Private Equity clients have been mortgages for new homes and for second homes outside of London.

“Thankfully, assisting Private Equity clients is one of our core areas of expertise so we understand the unique nature of each firm and the pay structures involved. We’re able to look at total income and consider carry to help clients achieve their goals,” she adds.

Secondly, brokers should be aware of the appeal of re-mortgages. Individuals working in private equity — particularly those at senior level — often have significant wealth invested. Re-mortgaging can be an effective way for them to gain liquidity without having to sell assets.

Investec also offers a Revolving Mortgage which enables eligible clients to have access to a flexible line of credit. The interest-only loans can unlock the equity in a main home by allowing individuals to withdraw additional funds when they need to and repay them over a ten-year period without early repayment charges.

“Our proposition allows us to truly tailor loans to the client's needs,” says Laura.

Crucially, having flexibility means deals can progress efficiently too. “The understanding we have means we can usually act quickly,” she adds. “This can add value for brokers and clients alike.”

 

Disclaimer:

Your property may be repossessed if you do not keep up repayments on your mortgage. Investec residential mortgages are only available for residential properties in England or Wales and are primarily available to UK residents and subject to eligibility.

Want to discuss your clients’ options? Get in touch today.