What’s up, it’s @hackedongrowth here, We all enjoy stories about rags to riches. They evoke not just illusions of riches, but also of optimism.
If someone else can convert nothing into plenty, perhaps we can as well. However, the majority of Americans turn sour as the affluent get richer.
We read about founders and partners flying around in private jets and earning hundreds of millions.
All while leveraging investments not their own. And that simply does not seem fair.
Indeed, it appears unjustified and selfish. These sentiments have given private equity a poor name, but on what basis are these negative views created, and are they justified?
Since most individuals have yet to learn what goes on behind the scenes in private equity or what it takes to be successful in the business, interestingly.
Most of us aren't even aware of how inextricably linked we are to private equity, whether or not we have interests.
2 and 20 by Sachin Khajura. To explore the world of private equity and learn what it is, how it operates, and what it takes to thrive in this specialized, secretive financial sector.
Here are 3 key takeaways from this book which is truly an astonishing work done by the author. let's have look at this-
1. Private equity is aggressive asset flipping.
You've certainly seen that real estate flip shows on TV when an extremely attractive couple buys a shabby house in a growing neighborhood.
Over the course of an hour, you'll see them destroy a wall here, build a deck there, and deal with a few problems like bad weather or unplanned costs as the show comes to a close.
A virtual tour of a stylish new residence with designer furniture and excellent landscaping is shown. The auction will then start. The property sells for a great profit, and the couple is now cash rich and looking for their next adventure.
Private equity is similar in certain ways, but the stakes are much, much greater. Of course, instead of just a few hundred thousand dollars, you're dealing with assets worth millions.
So, just what is private equity? Private equity is a sort of financial investment in the same way that buying stocks or putting money in a high-interest savings account.
People employ private equity to transform their money into additional money. Isn't it fantastic? Especially if you are a retiree who does not get a regular salary. You want your money to last as long as possible by multiplying it as much as feasible.
However, risk separates private equity from other forms of financial transactions. To begin, you'll need a large sum of money to play this game, far more than if you merely bought a few shares individually.
But there is one distinction between private equity and other types of investments.
How? Private equity often entails the sale of whole firms. These businesses are frequently in distress. They are about to go bankrupt, or they have lost the majority of their clients to competitors, or they have failed to modernize and are no longer able to provide.
You may be asking why someone would invest in such a firm. The reason for this is potential. A private equity business invests on behalf of other groups that represent individuals, such as pension funds.
The failing corporation will be viewed as an opportunity by the firm. Because of its severe circumstances, it will be cheaper to acquire, and the business will have an excellent staff to steer it back to health.
Like those house flippers who transform a slum into a mansion. But, more importantly, the team will develop the organization into a marketable business proposition. The business will sell at the perfect time and walk away with double or triple what it spent.
They win, the company wins, and most crucially, the firm's private investors gain. When. So, what makes this so dangerous? Again, a large sum of money is required to not only acquire an insolvent firm but to nurse it back to health over several years.
Remember, that money typically belongs to pensioners on a fixed income. But unlike Stock Market, where you may buy or sell at any moment, investors cannot withdraw funds from a private equity investment plan until a certain length of time has passed.
This period will last years, long enough to get the struggling firm back on its feet. Finally, there is always the danger that the flipped firm will not become profitable and will not command a high acquisition price, in which case the investment may merely be profitable.
Worse, it may sell at a loss. So, while private equity provides investors with large returns when it succeeds, when it fails, it fails spectacularly. But it's the promise of huge returns, and perhaps even the adrenaline thrill of high risks, that makes private equity so appealing to investors.
2. Private equity is the trendiest job in town.
There are several strings attached to private equity, the majority of which are financial in nature. Let's take a look at some numbers to see why. Private equity has more than quadrupled in the last decade to become a $12 trillion sector. Yes, that's correct. It's not a million. It's not a billion. Trillion. And it's projected to double again in the coming decade. Private equity is taking place all over the world, infiltrating our daily lives without our knowledge.
You'll never know whether a private equity group is flipping the dating app you're using, buying the supermarket chain you shop at, or using your pension fund to buy a media services company with the intention of tripling your investment in a few years.
Demand for private equity has resulted in the formation of hundreds of businesses, but twelve main firms dominate the market, notably Blackstone, which oversees roughly $870 billion in assets.
That's a lot of money, and it comes with a lot of responsibility to make the correct decisions for investors. Now that you're aware of the financial stakes, let's look at another component of this sector that contributes to its attractiveness.
It's a compensation scheme. Private equity partners, the specialists who make the important decisions on which companies to invest in and when to make huge transactions, are paid on a scale of two to twenty. They charge their clients a yearly fee of 2% of their invested capital plus 20% of any earnings.
This money is distributed across the farm team. That is, everyone's income and wealth are linked to the firm's performance. Everyone benefits when investors succeed.
Now, 2% may not seem like much, but keep in mind the magnitude of the statistics we're discussing. 2% of $875 billion is more money than the majority of us will ever see in our lives. That's what each company gets paid automatically every year, and 20% of profits? This is why senior partners in private equity are valued at $100 million by the time they reach their forties.
With corporations handling assets worth such enormous sums, you may expect them to have large staff, diluting how much ends up in everyone's bank account. However, the inverse is correct and it has nothing to do with desire.
3. Private equity businesses are totally different from Wall Street.
Let's look for a moment inside a typical private equity firm to get an idea of how they work. A job in private equity is not for the weak of heart; it is exclusive in every way. We'll go into more detail on what makes it so elite in the future, but for now, let's stick to the essentials.
The company you're visiting will most likely have a unique address. It's not near Wall Street if you're in Manhattan. You'll have to head north. In fact, you'll most likely end yourself on a street that borders Central Park, where the firm's boardroom has the greatest views in town. When you arrive, you will be met with tight security.
In private equity, privacy is non-negotiable. If a competitor learns about your business tactics, they may try to purchase the firms you're interested in before you do, either taking them from under your nose or raising the original price tag by bidding against you. And this will have a bad influence on your whole strategy. Keep in mind that it's all about buying low and selling high.
When you walk into the workplace, you'll find yourself in a calm, concentrated setting. The furnishings will exude quality and usefulness, and the huge kitchen will draw your attention.
You'll note that it's fully equipped with a variety of healthful alternatives and a high-quality coffee maker, so you won't have to leave the office for food. The founder will have the largest office, but you won't be able to see inside. They'll be too preoccupied to talk. Instead of phone calls or emails, discussions with the firm's partners are regular procedures.
The business may have 20 or so partners, and their doors will be open to encourage transparency and cooperation. You'll even hear a handful of them speaking candidly and seriously to one another. Each partner has a transaction team that works out of adjacent cubicles.
The deal group's goal is to examine every minute detail about a company's financial health and convey this information to the partner, who will then present the prospective deal to the owner. The transaction team consists of four professionals: an analyst, a mid-level associate, a junior partner, and a senior counsel. This team is in charge of planning transactions and business ideas worth billions of dollars.
Keeping the team tight and lean implies that everyone receives a larger share of the profits, but it also makes the team more nimble.
It is important to make informed judgments quickly, and being close-knit allows for this. Because of the tiny size of the team, each member has a great deal of responsibility.
There will be no one to step in or bail you out if you make a serious blunder. That is one of the reasons why a career in private equity is limited to a chosen few.
2 and 20 by Sachin Khajuria Here is the essential message here.
Losing money in private equity is not an option. Aside from profits, safeguarding a client's investment is critical, not only for the purpose of a firm's own profitability and image but also because millions of retirees rely on that investment to maintain themselves.
Your clients are paying a premium for your services, therefore if you can't guarantee them success, they should spend elsewhere. That is why private equity attracts dedicated individuals who understand how to take measured creative risks.
Years of focused hard effort and enormous personal sacrifice are required for success. Individuals are attracted to this profession for reasons other than the law of prophecy.
What keeps professionals in the company even after they've made a million dollars is the thrill of finding an opportunity where others see failure in a crisis and turning it into a victory for everyone.
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