How to Be King of Your Own Private Equity Firm

Below are the steps to setting up your own private equity company.  I have worked at multiple private equity firms and have been terribly slow to catch on to the "art" of how to do this.  Before starting you should read the infamous book "The Prince" by Machiavelli, to get you in the right mood.  Remember, this is about Power, Control and Take No Prisoners.

  1. The Set Up.  However, you do it – lying, cheating, persuading, ridiculing, maybe killing – you want to keep control in the hands of the fewest people, just you if possible.  Never give it up.  Say you will in the future, and then do not do it.  It is important at this point to seem like a good person, but you know you are not.  Good people do not get rich like you want to be.
  2. The Lawyer.  Get a bad ass lawyer.  Getting the right bad ass lawyer is critical.  This person needs to get everyone to sign an NDA (Never Divulge Anything or we're going to sue the every loving crap out of you and take away everything you ever got and everything you are supposed to get.. forever).  The lawyer should exhibit total devotion to the owners, like a bulldog, so much so that it feels like they would haul their own mother into court if needed.  They should tell everyone that they are doing it for their own good.
  3. The Profits.  Part of the secret to your success is how PE makes money.  It has been called the 2 & 20 model, but it has been changing around the last couple of years.  Generally, the PE company raises a Fund and gets a 2% Management Fee on the AUM and then a 20% carried interest in the fund assets after the investors receive a payout of about 7%.  This formula varies (the 2% can go down for bigger funds) but it is in the ballpark.
  4. The Employees.  The only thing you tell your employees is that they are to get a part of the carried Interest back-in and it will make them freaking rich.  Focus on freaking rich.  You should run numbers that prove to them that with your brilliant investing prowess the carried interest will be so humongous that even a tiny fraction will make them freaking rich.  Then you give them tiny fractions.  It is ok to do this because if their tiny fraction is worth anything, your giant fraction is worth a freaking fortune.  You are not really giving them anything because it may not even happen.
  5. The Rub.  Here is the secret.  Take as much of the management fee as you can possible get, leaving just enough to pay the employees a decent salary.  There is huge money in this management fee, and you can literally get filthy rich from it… even if you are the dumbest investor on the face of the planet!  You tell the employees that you deserve it because you have had to put your own money as "risk" equity and you could lose it all.  That should calm them down.  The truth is that if you can get most of the management fee, it will cover everything you put up and still give you generational wealth!   
  6. The Big Reveal.  Here is another secret.  No one will really know how the fund performs for over 10 years and by then, you will have raised the next fund or two.  It takes about 5 years to find all the investments and another 5 before all the investments have conclusions.  The beauty is that you can pretty much bump up the "valuations" of the fund for the whole time.  You can make it look fantastic, even if it a big of crap.  Few people can ever figure out what the truth is because there are so many complicated investments.  Even better is that before the conclusion is in, you have raised the next fund that is bigger than the first!  That means bigger management fees!  You can do this because you have bumped up all the "valuations" to make yourself look brilliant.
  7. The Fear.  At some point the employees may "catch on" to what the real deal is about the management fee.  If you set thing up right and have control, then it is time to instill fear.  Fire someone.  Make sure everyone sees it.  Pick someone higher up.  Make it a public execution.  Total humiliation.  No one will be asking about the management fees again.
  8. The Investors.  Here is another secret.  No one will ever question your valuations.  Why you ask?  The representatives of these investors want to look like they have been real smart investing the money in your company and the last thing they want is you writing down their investment.  Also, and this is big, most will have moved on to other companies well before the fund conclusion and it will not matter a hill of beans to them personally  It will only matter to all those dumb retired people they are managing more for and of course they have no voice in this.
  9. Win/Win.  You can see now that there is only upside for you in this.  Sure, you may leave a lot of disgruntled people in the world but most of them will have NDA's.  The other thing is that you will have so much money that you can set up some type of "trust" fund that does some philanthropic thing, like dog neutering, and that will make you seem like a good person and that you didn't really screw all the people that helped build your fortune.  Kind of like the Andrew Carnegie approach.
  10. Well there you have it.  It is simple and only a few key points.  One other thing that you need for this: you must be a good salesman.  To be a good salesman, you just talk loud and confidently.  It does not matter if you know what you are talking about, if you speak loud enough and sound confident, most people will believe you.  You should also throw in overly complicated financial structures that you will use like "Tranche" and "Preferred" because everyone knows that money is made by complicated financial structures not by good creative ideas and execution.

    Good luck!

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Comments (39)

Jun 10, 2021 - 5:07pm

So much truth in a single post.  Very accurate.  I could add on 10+ other schemes if I wanted.

  • 2
Jun 10, 2021 - 5:35pm

I don't want the interns/first-year analysts on here to get too excited about starting their own funds.  10 years down the line, when I'm starting my own, I don't want there to be a glut of fund "supply" (like HFs have) compressing my own 2/20 :P 

  • 2
  • Analyst 1 in IB-M&A
Jun 10, 2021 - 5:46pm

You forgot the most important part-have asset prices rise throughout your entire career in one of the largest economic expansions in history. Stress the operational improvements your team makes rather than you blindly being able to claim leverage is genius.

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Jun 10, 2021 - 6:11pm

Yes very gU.S. 10YR Historyood point, be sure that you are in a 40 yr bond bull market where interest rates go from 15% to 1%.

  • Analyst 1 in IB-M&A
Jun 10, 2021 - 7:21pm

The math is really gross when you put it in perspective:

Let's say a generic investment gives off $15 every year and let's say it's $100 to buy it. So you get a market yield of 15%. Now that same company unchanged giving off $15 will be bid up to that market yield of 1% so it's $1500 to buy the company. Gross over simplification, but that's why rates are so important to understand and why value is whacky.

  • Managing Director in PE - Other
Jun 10, 2021 - 11:00pm

An ex-EIG partner already posted this on LinkedIn so unless you are him (he wasn't anon) then maybe give him some credit?

  • Managing Director in PE - Other
Jun 18, 2021 - 9:40pm

Curt Taylor of Saddlebrook wrote this, connect with him and see for yourself 

  • Prospect in VC
Jun 10, 2021 - 11:32pm

I think I've made a mistake. Attempted all steps as stated, but I'm now being prosecuted for "fraud"... Don't recommend

Jun 18, 2021 - 1:58pm

Capitalism is bad - just not as bad as all the other options.

if you like it then you shoulda put a banana on it
Jun 11, 2021 - 10:51am

I see there are some sensitive PE bois throwing monkey poo.  It's ok PE bois you will continue to make $400k with little-to-no downside for doing nothing intellectually stimulating / simply managing processes and doing some of the same work you did in IB.

I of course did not write this, an actual PE partner did (as someone mentioned earlier).  I don't think that matters though.  The PE business, in most cases, is hilarious to me and at the same time the greatest business model ever created.  I think the post generally explained why, though with a bit of bias from a jaded former PE lifer.  If an 18 year old asked me - "what should I do if I just want a stable way of making a LOT of money with little downside and I don't really care about my time or what I actually do all day?" I would say "well that's easy, PE".

This was my swan song, just too many things to read these days.  FYI to the youth - Twitter is an absolute gem of a resource for those involved in the public markets and that's where I spend more time these days.

  • 6
Most Helpful
Jun 11, 2021 - 11:28am

Hilariously accurate.

Seconding the points some others have made about being in a bull market the entire time. One of my former higher-ups once said in response to the question of "how do you generate alpha?":

"Invest during an unprecedented and never ending bull market that has remained intact over the entire course of your career."

That is the secret sauce.

  • Intern in IB - Gen
Jun 12, 2021 - 7:25pm

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  • Analyst 1 in IB - Cov
Jun 24, 2021 - 12:23am

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