Private Equity Pay
On a cold today, this photo seems appropriate - snow to come but let us hope not too much if at all. Image taken by Moe in Yosemite or 1982 or '83 before Bear Valley.
Private equity pay: despite the financial mess, fund managers maintain their salary thanks to the ever-ongoing 2% management fee charged on assets. For your typical Senior Associate, according to PEI, this is >$460,000 per year while partners earn above a bar. GPs at the mega-firms, or those with at least $1 billion, receive many times this figure. But, as any fund investor appreciates, a general partner motivated by 20% of the upside. Historically private equity has outperformed public stocks rather substantially. Well, until now that is with worse to come as the industry's (over)leverage works its way through the portfolio. To appreciate how bad, consider secondary players who provide industry liquidity by purchasing private equity stakes on the cheep - today they sit on the sidelines despite everybody selling anything before the house. Next year, no doubt, the secondary industry will return ensemble driving up prices .. until they, too, have a hard time making a return. Same as it ever was.
Fund managers find themselves in a pickle if A) they cannot raise another fund (many cannot) or B) the partnership breaks under the strain (restructurings are a drag but the fees keep a com'n). PAI, for instance, a French 'mega' firm who has cooked its goose - maybe. PAI's m&a advisor insinuated himself into the partnership and forced out two founders this year triggering a Key Man event. Investors rightly demanded their dough. Since PAI receiving $100 million of fees per annumn, the fight is 'on.' Unfortunately for investors, PAI's dissolution requires two-thirds investor consent. I give it less than 50-50.
Despite a few bigger, bunk or over-leveraged firms, private equity without hesitation good for industry and so society. Businesses owned by an independent, financially motivated shareholder generally better managed then families or publics; under-performing CEOs may get fired, redundencies cut fat, not muscle. A few lucky owners get paid a lot of money. The losers, like PAI, should die quickly .. but they rarely do.
