Does an MBA Pay in Private Equity?

by David Kochanek on

The value of an MBA is hotly debated all areas of the financial industry, and no less in private equity. With the total cost of an MBA at leading schools crossing the $150,000 mark, this question is critical to those considering pursuing an MBA. Add in the lost earnings while in school full time and student loan interest, and the cost for some can easily double that number.

In light of the rising costs, if private equity is where you want to focus your career, you need to consider if getting an MBA will help you earn sufficiently more to justify the expense and sacrifice. It turns out the margin may be narrower than you might think.

Academic Inflation Makes Justifying the Cost More Difficult

The cost of graduate education across the board has increased dramatically in both the United States and around the world. An MBA at Harvard Business School would have cost just $54,000 at the turn of the century, while the current tuition cost is now almost $100,000 and that doesn’t include fees, living costs and lost earnings. This increase is much higher than inflation and the rate of earnings growth in the financial sector over that same time period. The rising costs are forcing many prospective students to question whether an MBA is still a ticket to financial success.

Tuition costs are only the beginning when it comes to the financial pain of pursuing an MBA. Potential students also need to factor in living costs and lost earnings. Our analysis of private equity compensation data concluded that when considering the cost of an MBA (we used 80% of the average cost at the top schools) and factoring in lost earnings, the average graduate could expect to earn only 41 percent of their investment back in the first seven years (a generous period of earnings advantage).

Our data shows that after five to seven years, experience, not education, becomes the main driver of increased base compensation. Further, the cost of an average MBA program, with lost earnings factored in, has an estimated payback period of a whopping 17 years.

Base Compensation is Higher, Though Bonuses Unaffected

Despite questions over whether the investment in an MBA will pay for itself, our findings do indicate there is a base pay advantage for MBAs. Over the past three years, as part of our private equity compensation survey, base salaries have averaged 13 percent higher for those with an MBA. When it comes to bonuses, however, we found that there was no discernable difference between those with an MBA and those without. Bonus levels are generally (although not always) tied closely to the fund’s performance.

As a result, in the private equity industry, total compensation is only marginally higher for MBAs, with about a 5 percent advantage in 2012. This gap has actually been declining over the past several years, indicating that an MBA has not held its value in the world of private equity.

Does Experience Outweigh an MBA when Setting Compensation?

Our survey found some interesting trends when it came to private equity compensation and the combination of experience and education.  For those with less than five years of experience, there was some value in getting an MBA, with base compensation about 36 percent higher for less experienced professionals with the degree.

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  • Dugol

    Thank you for that article : I decided not to pursue the degree after I had been given a seat, and I’m happy to see an article that is fair. Most of the time, these “research” are plain advertising.

  • MM PEGuy

    I enjoyed this article. I am currently working in PE. My firm has a mix of MBA’s and non-MBA’s. I have found that you do not need an MBA to advance in the firm, however, there are some benefits to acquiring the degree (expanded skill-set, broader network, perceived credibility, future ability for mobility…). The one thing to consider is if the lost earnings and cost are worth these benefits. For me, I had already broken into PE (middle market firm from a middle market IB). I still desired, however, the benefits I mentioned, which is why I chose to pursue a part-time MBA from one of the top 10 programs (Booth, Kellogg, Ross, NYU). The program I attend is not in my city and I fly into the city for the weekend to partake in classes. I have loved the experience. At first, I was worried that the weekend program at my school would not live up to the academic rigor of its full-time program, but I was quickly proven wrong.

    I think this is a great option for any young associate currently in PE who does not want to sacrifice the income but would like the degree. Many of the top schools (Booth, Kellogg, Ross, NYU, Haas) offer weekend programs which, during my research appeared comparable to their full-time programs.

  • Dreamer

    I think there is two things going on here:

    1. The people who can move ahead without the MBA are truly the best and can make the jump from associate to senior associate.

    2. This happens more often in smaller funds. At the fund I worked on, only one person in the past three years was promoted without the MBA and is not because the other associates are not good but the firm prefers associates to leave and the comeback.

    If you are completely sure you want to work in PE and are already in PE and get promoted then i don;t see the point of going. If I had gotten promoted I would not have applied’

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