Why can you make so much money in private equityas aninvestor?
Let’s look at both sides of the transaction. Investment bankers make money by advising companies, structuring sales, raising capital, and taking a percentage fee on each transaction.
By contrast, private equityfirms make money by exiting their investments. They try to sell the companies at a much higher price than what they paid for them. The profits are then divided up based on a distribution waterfall. The amount paid to the GP is generally referred to as carried interest, or carry, and is typically around 20% of the profit made on a fund exit.
The GP also collects management fees, typically around 1.5-2.0% of committed capital during the investment period when new investments are allowed (usually the first 5 years). They charge this management fee to pay salaries and “keep the lights on,” that is, to cover the core operating costs of the fund before and between investments, since profits in PE are very lumpy — there can be years of no profit and then suddenly tons of profit come raining down in a single year when multiple companies are exited.
Management fees alone represent a pretty significant chunk of cash over the life of a fund. And they are not based on performance! If a fund has a 10 year life, you can do the math. For even a paltry $50M fund,a 2% annual management fee means $1M per yearfor at least 5 years, regardless of performance, no matter how few investment professionals there are (there might only be one or two!). A$1B private equity fund would draw $20M per year in management fees alone, a handsome sum especially if you have a small investment team.
That’s why PE firms pay such high salaries to associates and investment staff. Mega funds may have many billions under management leavinghundreds of millions just for employee compensation. Since running a PE fund isn’t exactly a capital intensive business (you only need some laptops, phones, and desks), employees end up getting paid a lot.In terms of headcount, even the largest mega cap funds may only have 150investment professionals. Small firms might just have a dozen or even a few.
Average compensation per employee from management fees alone could easily top $1 million annually, although senior professionals would always earn more than junior staff.
Be sure to check out our PDF guide “How to Nail Your Private Equity Interview(whether you have finance training or not)” for in-depth tips and strategies on how to successfully interview forjobs at top private equityfirms!
Also be sure to check out our step-by-stepPrivate Equity LBO Modeling Training Videosforwalk-through tutorials on how to build an LBO model, navigate Excel with ruthless efficiency, and rapidly create an LBO PowerPoint deck to present to your PE interviewers.
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FAQs
Private equity owners make money by buying companies they believe have value and can be improved. They improve the company, which generates more profits. They also make money when they eventually sell the improved company for more than they bought it for.
Why do people in private equity make so much money? ›
Private equity owners make money by buying companies they believe have value and can be improved. They improve the company, which generates more profits. They also make money when they eventually sell the improved company for more than they bought it for.
Can you make a lot of money working in private equity? ›
If you want to earn the big money in private equity, you probably want to work for a fund with the maximum amount of assets under management. As the charts below reflect, the highest compensation in U.S. private equity funds is typically available in funds with between over $20bn under management.
How much money can you make in private equity? ›
5.1. Private Equity vs Investment Banking Salary
| Positions | Total Compensation (salary & bonus) |
|---|
| Private Equity | Investment Banking |
|---|
| Associate/ Senior Associate | $150K – $400K | $250K – $400K |
| Vice President | $500K – $800K | $500K – $700K |
| Principal | $700K – $2,000K | $500K – $1,000K |
2 more rowsYou might say you want get into private equity because you're interested in investing and going deeper into finance. That's fine. But the answer would be much better if you could mention that you want to learn more about investing because you've loved it since college when you part of your school's investment club.
Are private equity guys rich? ›
The 22 members on the latest Forbes 400 list who made their fortunes in private equity are now worth a combined $153.7 billion. Leading the list this year is Stephen Schwarzman, chairman and CEO of Blackstone Group, with a net worth of $37.4 billion.
Why is private equity so popular as a career? ›
Private equity careers present a prime opportunity for finance professionals to work with concepts on a long-term basis rather than in the context of “one and done” deals.
How do people make money from private equity? ›
Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt.
Do you make more in private equity than investment banking? ›
Private equity firms are investment businesses comprising investors who use their capital to invest in private businesses. Those working in private equity can often achieve a higher salary, but their income may be less stable than those working in investment banking.
What is the highest position in private equity? ›
Partner Or Managing Director (MD)
In the majority of cases, this is the most senior position that can be obtained at a private equity firm.
Private equity tends to mean less hours for more money. In private equity, you'll also be responsible for a lot of different tasks. The deal teams are lean and your decisions will have a high degree of permanence, which is why I'd say the stress level is overall higher in private equity than in banking.
How much does a CEO of private equity make? ›
Private Equity Ceo Salary
| Annual Salary | Monthly Pay |
|---|
| Top Earners | $134,000 | $11,166 |
| 75th Percentile | $95,000 | $7,916 |
| Average | $79,639 | $6,636 |
| 25th Percentile | $51,500 | $4,291 |
Key Takeaways. Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020. Between 2000 and 2020, private equity outperformed the Russell 2000, the S&P 500, and venture capital. When compared over other time frames, however, private equity returns can be less impressive.
How do you stand out in a private equity interview? ›
The trick to private equity job interviews is to demonstrate a balance of soft skills and hard analytics. Most firms prefer candidates with training and a proven track record at investment banks. Some things don't change. Quant ability is important, but it's also difficult to express in an interview.
What excites you about private equity? ›
Second, you can say that you want to work in private equity because you'll gain much more exposure to the deal process. You'll learn significantly more by being at the frontline of the due diligence work. Third, you can say that you want to be actively involved with post-investment operational work.
How to impress private equity? ›
If you have at least a few years of experience in investment banking or consulting, your chances of impressing recruiters in PE can increase. It's especially beneficial if you've worked for a top organisation and already worked your way up, at least to a mid-level position.
How rich do you have to be to invest in private equity? ›
What is the minimum investment required? The required minimum investment is often $25 million, but can be higher or lower. Some private equity firms have lower minimums of several hundred thousand dollars.
Is private equity the most prestigious? ›
While both careers are highly regarded and financially lucrative, the choice is personal. Investment banking is typically viewed as glamorous but also requires longer hours and the sacrifice of a personal life. Private equity is extremely prestigious.
