That’s why PE firms pay such high salaries to associates and investment staff. 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. For even a paltry $50M fund, a 2% annual management fee means $1M per year for at least 5 years, regardless of performance, no matter how few investment professionals there are (there might only be one or two!). And they are not based on performance! If a fund has a 10 year life, you can do the math. Management fees alone represent a pretty significant chunk of cash over the life of a fund. 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. 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). 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 profits are then divided up based on a distribution waterfall. They try to sell the companies at a much higher price than what they paid for them.
Investment bankers make money by advising companies, structuring sales, raising capital, and taking a percentage fee on each transaction.īy contrast, private equity firms make money by exiting their investments. Let’s look at both sides of the transaction. Why can you make so much money in private equity as an investor?
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