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.
Why do people in private equity make so much money? ›
Private equity firms buy companies. Then, they operate and try to improve those companies. Finally, they try to sell these companies at a profit. Private equity employees are compensated for making good investment decisions.
Can you make a lot of money working in private equity? ›
Private Equity Senior Associate Salary + Bonus: These increase incrementally over the Associate level, but not dramatically so. The range might be more like $250K to $400K depending on the firm size, region, performance, etc.
Is private equity the highest paying job? ›
Hedge fund pay is higher than pay in private equity. The average hedge fund employee earns $487k in combined salary and bonus; the average private equity professional earns 'just' $263k in salary and bonus. The real difference, though, is in pay per hour.
How much do you really make in private equity? ›
Private Equity Salary, Bonus, and Carried Interest Levels: The Full Guide
| Position Title | Typical Age Range | Base Salary + Bonus (USD) |
|---|
| Associate | 24-28 | $150-$300K |
| Senior Associate | 26-32 | $250-$400K |
| Vice President (VP) | 30-35 | $350-$500K |
| Director or Principal | 33-39 | $500-$800K |
2 more rowsThey emphasize the ability of private equity firms to infuse capital into struggling companies, potentially saving them from bankruptcy and preserving jobs. These firms have the financial resources and strategic expertise to carry out changes needed by whoever owns them while streamlining operations and driving growth.
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.
How much does a VP in PE make? ›
Vice President Private Equity Salary
| Annual Salary | Monthly Pay |
|---|
| Top Earners | $244,500 | $20,375 |
| 75th Percentile | $190,000 | $15,833 |
| Average | $157,532 | $13,127 |
| 25th Percentile | $115,000 | $9,583 |
Not only do private equity firms have extremely particular job requirements, they also offer relatively few roles. To get into a private equity firm, you not only need the “right” background and education, you also have to be a solid fit with the existing team, and be ready to ace the private equity interviews.
What degree is best for private equity? ›
Private equity firms usually seek someone with a strong sense of numbers. As such, the majors they generally look for include Finance, Accounting, Statistics, Mathematics, or Economics.
but nowhere near as much as in management consulting. While the travel will be less, the work in private equity is very stressful and demanding, so the hours you actually spend working may be more stressful or mentally demanding.
Is private equity a tough career? ›
Private equity professionals work long hours and are highly competitive and must think critically, and have a passion for financial investing deals, not just following the markets. Other requirements to start a career in private equity are: Excellent grades and a notable transcript in school.
Why is private equity so popular as a career? ›
Private equity firms look for small businesses or startups with high growth potential and offer them expertise and financing, with the goal of eventually selling the company for a profit. The private equity market has grown substantially, and as of 2021, private equity firms manage roughly 20% of U.S. businesses.
How much does a Blackstone VP make? ›
Get feedback on your pay or offer
Create an anonymous post and get feedback on your pay from other professionals. The estimated total pay range for a Vice President at The Blackstone Group is $220K–$349K per year, which includes base salary and additional pay.
How rich do you have to be to invest in private equity? ›
1 Funds that rely on an Accredited Investor standard generally require a minimum net worth of $1 million for an individual (excluding primary residence), and $5 million for an entity. for an individual, and $25 million for an entity. be appropriate for you.
How much does a CEO of a private equity firm make? ›
How much does a Private Equity Ceo make? As of Jun 9, 2024, the average annual pay for a Private Equity Ceo in the United States is $82,146 a year. Just in case you need a simple salary calculator, that works out to be approximately $39.49 an hour. This is the equivalent of $1,579/week or $6,845/month.
Is a career in private equity worth it? ›
A role in private equity is a very competitive yet rewarding career path. Getting started in a profession in private equity (PE) requires strong analytical and networking skills to jumpstart a career at a PE firm.
What makes someone successful in private equity? ›
A successful private equity leader must have a strategic vision, adaptability, strong communication skills, financial acumen, and an entrepreneurial spirit. By implementing the right strategies, private equity leaders can drive growth and profitability in their firms and secure their place as leaders in the industry.
Is private equity still lucrative? ›
Indeed, private equity (PE) can consistently outperform publicly traded equities, on a risk-adjusted basis, over the medium and long term (see chart).
