Adam Coffey

“Private Equity Evolution There is an old saying that imitation is the sincerest form of flattery. Pioneering firms had such massive success that it fueled the growth of more than 5,000 copycats over the last three decades. As a result, it should come as no surprise that the collective deal activity touching private equity has exploded right along with it. During the 1980s, less than 1 percent of merger and acquisition activity involved private equity. Today, it is estimated by EisnerAmper, in their 4Q 2018 PE Insights Report, that approximately 35 percent of all mergers and acquisitions completed in the United States in 2018 involved private equity and that within five years, that number is expected to eclipse the 50-percent mark.”
― Adam Coffey, The Private Equity Playbook: Management’s Guide to Working with Private Equity

“How the Private Equity Firm Makes Money Going back to our mutual fund example, oftentimes when you invest in an actively managed mutual fund there are management fees associated with that fund. Private equity acts in the same way. They typically charge a management fee of about 2 percent. Management fees are how private equity firms cover their overhead, not how they generate wealth. They generate their wealth through carried interest. Limited partners typically pay 20 percent of every dollar of profit back to the private equity firm. If as a limited partner you have $1 million invested, you’re being charged a 2 percent management fee every year for the capital that’s invested, and then when they sell a company, you pay 20 percent carried interest on the profit. Typically, there is a minimum rate of return that limited partners must receive, called the preferred return, before the general partner (the private equity firm) can charge carried interest and collect the fee. Let’s go back to the example of providing $120,000 of capital. When you got the $360,000 back, that included $240,000 of net profit. The carried interest charge, 20 percent, goes to the private equity firm and was already deducted prior to the distribution. That is their profit and where wealth is generated within the private equity world. These firms also invest in their funds. Limited partners want to know that the people working to invest their money have skin in the game. Therefore, private equity firms will create a subfund so their employees can invest their own money and coinvest alongside the fund every time the fund buys a platform company.”
― Adam Coffey, The Private Equity Playbook: Management’s Guide to Working with Private Equity