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 think have value and can be improved. They improve the company or break it up and sell its parts, which can generate even more profits.
Can you make a lot of money in private equity? ›
Private equity is a very lucrative career. As an asset class, private equity has enjoyed tremendous success over the past decade. Investors around the globe continue to pile their money into private equity firms.
Is private equity a high paying job? ›
For the vast majority of first-year private equity associates, the base salary is around $135k to $155k. Then, based on fund performance, bonuses tend to range from 100% to 150% of the base salary.
Can you become a millionaire from private equity? ›
One way is to sell the company at a profit after making improvements to its operations. Another way is to take the company public, which can generate a large capital gain for the private equity firm. Some of the world's richest people have made their fortunes through private equity.
Is working in private equity lucrative? ›
So, after learning how much work you'll be putting in, you'll be happy to know that it's not all for nothing. As many people know, working in private equity can be very lucrative. While the long hours can be a deterrent, it's safe to say that you are well compensated for your hard work.
How much does a VP make in private equity? ›
Private Equity Vice President Salary in California. $113,500 is the 25th percentile. Salaries below this are outliers. $187,500 is the 75th percentile.
Is private equity a risky job? ›
Private equity investors also face greater market risk with their investments compared to traditional investments since there's no guarantee that any of the small companies in which private equity firms invest will grow at all.
Is private equity a stressful job? ›
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. Very importantly, there's also no one around to check your work.
Are people in private equity smart? ›
Private Equity Career Training
PE firms are small, tight-knit, and full of extremely smart and highly motivated people.
How long do people stay in private equity? ›
The Private Equity Career Path
| Position Title | Typical Age Range | Time for Promotion to Next Level |
|---|
| Associate | 24-28 | 2-3 years |
| Senior Associate | 26-32 | 2-3 years |
| Vice President (VP) | 30-35 | 3-4 years |
| Director or Principal | 33-39 | 3-4 years |
2 more rowsWarren Buffett is known for his successful investments in the stock market, but he has also made significant investments in private equity firms.
What is the average income for private equity? ›
What Is the Average Private Equity Firms Salary by State
| State | Annual Salary | Monthly Pay |
|---|
| California | $89,038 | $7,419 |
| Maryland | $88,832 | $7,402 |
| Tennessee | $88,240 | $7,353 |
| Utah | $87,969 | $7,330 |
46 more rowsPrivate Equity Associate salary in India ranges between ₹ 3.0 Lakhs to ₹ 45.0 Lakhs with an average annual salary of ₹ 11.1 Lakhs. Salary estimates are based on 138 latest salaries received from Private Equity Associates.
Why is it so hard to get a job in private equity? ›
Landing a career in private equity is very difficult because there are few jobs on the market in this profession and so it can be very competitive. Coming into private equity with no experience is impossible, so finding an internship or having previous experience in a related field is highly recommended.
What are the average hours in PE? ›
At many smaller funds and middle-market funds, you can expect to work 60-70 hours per week, mostly on weekdays, with occasional weekend work when deals heat up.
Where do people go after private equity? ›
Those who wish to broaden their horizons or simply desire a change of pace will often migrate to similar sectors such as hedge funds or portfolio management. Additional exit options include: Being hired as a chief analyst by another firm.
How much does the average person in private equity make? ›
What Is the Average Private Equity Firms Salary by State
| State | Annual Salary | Monthly Pay |
|---|
| California | $89,038 | $7,419 |
| Maryland | $88,832 | $7,402 |
| Tennessee | $88,240 | $7,353 |
| Utah | $87,969 | $7,330 |
46 more rowsAccording toCambridge Associates' U.S. Private Equity Index, PE had an average annual return of 14.65% in the 20 years ended December 31,2021.
What are the odds of getting into private equity? ›
For a student looking to break into one of the top 10 PE firms, your chance is 1 in 300 or 0.33%. To break into one of the top 10 hedge fund firms, your chance is 1 in 147 or 0.68%.
