Have we seen the last private equity billionaire?
The more I think about it, the more I just don’t understand how this level is feasible, even assuming great GP economics. The “20” part of the fee math appears to have been totally obliterated by competition at the MF size necessary for the “2” side of the math to work out, you’re not going to get the same kind of gross MOICs of scale targets that you used to, and leverage isn’t as available as it used to be. To get deployment out the door you need to probably boost your partnership ranks quite a bit, too, which splits the pie even more. At the veeeery least, it feels like if you reach these levels, you’re doing it at an age where you’re essentially just doing it for your late-life philanthropic decisions and your kids’ inheritances. And it’s not like VC where individual deal ceilings for the hits are high enough to offset any of the above. Am I missing something / have you guys done the math on this?
Yes. Nobody is going to become a billionaire off of working at any of the MF/UMM PE shops that currently exist. There is no next Jon Gray at Blakstone or Boro/Spaht at TB to the same way there was in the past. PE is at a similar stage as HF's reached a while back: which is a very mature asset class. You can become a billionaire as a MM/UMM PE founder depending on returns, but you will have to deliver outsized returns. This shouldn't come as a shock to anyone: most billionaires are people who founded their own thing not those who worked for others. The math behind even being a 1bn fund LMM PE founder when considering investable universe and range of possible returns is heavily favorable to being a MF PE partner, especially at a public MF fund.
Many firms still charge 2 and 20 or even over that. It's just that those funds are all in the Middle Market and usually are the ones who are massively oversubscribed but do not want to scale too quick. Know KPS for example charges well above 2/20 for every LP. Think some of these high-flying MM/UMM firms are also 2/20 for everyone with no discounts to large names. The better demand for your firm from LP's the better fee structure you can ask for is a general rule of thumb here.
i agree with a lot of this, except that i disagree that "most are still charging 2/20 or even or that". Once you get past $500-1B fund size, fees seem to come down. Yes some still charge 2% at this level, but once you get past $2b, it becomes exceptionally rare.
Ignore title. I’m surprised you think this. What’s your data? I’m at a large cap buyout fund and we definitely charge 2/20. In undergrad I worked at an endowment and never saw a sizable buyout fund charging less than 2/20. There’s one infamous name that charges 3/30 (to be fair the only one I’ve ever seen). My data could be outdated so genuinely curious.
Fee compression exists or is at least impending, but I’ve not seen it upmarket for buyout.
"...most billionaires are people who founded their own thing not those who worked for others."
Laughs in Michael Milken ;)
never is such a strong word. tailwinds are gone and certainly generic 12% IRR buyout fund managers are going to have a hard time, but come on that’s just one strategy. look at the amount of capital going into DC/infrastructure. AI transformation roll ups. defense and re industrialization.
there will be many more PE billionaires. just don’t expect to be one if you take the megafund path.
Many thanks for the insights, may I ask for people started in Real estate, which tailwinds suits me better and which trend should I join? Many thanks in advance!
No there will be another - but then many will go to zero some go to jail. Mostly in vindictive fury as a cascade of municipal pension induced bankruptcies develop.
Let me elaborate - the industry is one symptom of Weimarian malinvestment and post gfc 2 will shrink to a gaggle of fundless sponsors buying everything out of chapter 11.
My guess is that there is a decent chance there will be a new billionaire printed who worked their way up in PE. Mainly because billionaire is no longer (and already isn’t) that 1% of a 1% outcome. Billionaire today is like what millionaire was 70 years ago maybe.
The math is as follows, take a random publicly traded MFPE or a soon to be MFPE with new IPOs in the pipeline like General Atlantic. Some “household” or lifetime kid like the next Jon Gray joins as early in their career as possible. Rises to the top and is compensated with very heavy amounts of stock due to ownership alignment and all the other general reasons corporates like to pay stock. The kid is on the path to be CEO. The board and shareholders want the CEO to own a meaningful amount of the company to align interests. Let’s say this person doesn’t even get 1% of the company but only 10bps. If markets keep going up and market caps keep going up eventually one of these $100bn market cap PE firms like BX, KKR, APO etc can follow JPM and other mega caps to becoming a $1T market cap company. This may only be in 20/30 years or whenever when there could be plenty of $10T+ market cap companies in tech or whatever. Now that whiz kid is now CEO of a $1T financial firm / PE firm / asset manager and owns 0.001% or $1B of stock. There is a new PE billionaire
That said the industry may not be the billionaire printing factory and seems to likely not be the place to create 1% of 1% outcomes which from my studies has generally been those who create large scale inventions/improvements to society at large. Rockefeller, Vanderbilt, Buffett, Schwarzman, Musk, Bezos: railroads, steel, investments/insurance, PE/private investments, electric cars/space, e-commerce, etc
Open to comment. Thanks
Also fwiw before that even happens likely there is already some $100mm+ net worth person already in some publicly traded or MFPE firm that if they continue to rise the ranks, earn carry, compound their current net worth at 15%+, and more stock or whatever, they will cross the $1B threshold in a decade or two or whatever.
you mean 0.1% (or 0.001 without the percent sign) but point very well taken. I don't see why the people here can't see there may even be more billionaires because the meaning of billion has changed. And $200M today, reinvested in two funds doubling (5 years at 15% IRR) is $800M in 10 years. And at 50 w/ $15M comp p.a you'd close that gap easily. Of course much of your net worth will be in jets or mansions but it's still $1B.
We need to stop masturbating and get back to work.
Look at Dave Stinnett at Trive... have a carry structure that incentivizes individual contributors + a few monster exits and it's possible.
What happened? Not much details
Became a billionaire recently after a few A&D exits
I think the economics are definitely harder than they used to be. Bigger funds may bring in more management fees, but lower returns, higher costs, and more partners can spread the upside pretty thin. It seems much harder for one person to build billionaire-level wealth from PE alone unless they already own a large piece of the management company.
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