Private Equity Pt. 2

Fees and Profession

The profits that are actualised on a quarterly or yearly basis are divided differently depending on the firm. Specifics are too numerous to cover. Noteworthy, however, are two consistent factors: profits and fund size. The limited and general partners have a fee arrangement that usually takes these two factors into account, and the most common of these arrangements is informally known as “Two and Twenty”. This arrangement is typical in all variations of asset management, including venture capital and hedge funds. “Two” represents the 2% of the assets under management (AUM) and refers to the annual general management fee, regardless of performance. “Twenty” represents the 20% of profits that the general partner is entitled to, beyond a predetermined benchmark. 

For example, on a $1 billion fund, the manager will earn $20,000,000 as a management fee, even if the fund performs poorly. If, however, the fund performs well, profits made beyond the benchmark are divided with a 20/80 ratio. A firm with a benchmark of 5% ($50,000,000) profits, having earned however 20% ($200,000,000) in profit, will earn the general partner $30,000,000 (20% of the $150,000,000 exceeding-benchmark profits) in performance pay.  

At the upper end of the earnings distribution, this simple arrangement has made private equity managers tremendous fortunes. George R. Roberts from KKR earned $181 million in 2015, while Leon Black from Apollo Global Management took home $199 million. Yet, these salaries seem unimpressive when compared to Stephen A. Schwarzman’s $799 Million as CEO of Blackstone.

It is self-evident that these salaries are not found across the job hierarchy, but average earnings remain incredibly high as compared to other sectors. Entry level positions occupied by 23-33 year olds, such as analyst, associate, and senior associate, will earn on average $80,700, $107,700, and $138,000 respectively in the United States. In the middle market, where deals (investments) may range from $50million to $500 million, vice presidents can earn approximately up to $500,000. Positions above vice president will see salaries in the low seven figures, exceeding the vast majority of other ‘employee’ positions.

This type of earning potential undeniably contributes to private equity’s ability to attract elite talent from a vast range of disciplines. The sector has added to its ranks Fortune 500 managers, accountants, consultants, and lawyers. They hire from a range of academic backgrounds including history, engineering, and medicine, and, alongside investments banks like Goldman Sachs, occupy campus recruitment positions at elite universities. Private equity firms alongside their fellow financial institutions are notorious for their cutthroat hiring process.

Not only will interviewees have an outstanding academic background, they will also have a versatile range of other accomplishment. Whether these are accolades in sports, music or volunteer services, private equity intends to hire people competent in a wide range of domains.

Post Editing by Tom Handels

Kariem HafezComment