How do Private Equity Firms and its partners make money?

[@kvs123100]

Sad to these these knowledge enhancing videos have so less views! Indeed PE is the game of rare brains!

[@SteveBalaban]

Thanks for your comment Kunal.

[@siiiiiiier]

Thank you so much for taking the time to make these instructive videos! Thanks to you, I am currently reading the King of Capital and I got to learn so much about the industry. I am also taking a modelling course and applying for IB analyst positions in the hope to pave my way towards a career in private equity in the future...

[@SteveBalaban]

Hi Sara, Thank you very much for your comment. How are you liking King of Capital so far? Feel free to share any feedback on it so others can benefit. Also, good luck with your applications for the IB analyst positions!

[@JohnSmith-si8nz]

Thank you for this video ! What is usually seen as performance in a PE GP-LP contract? Is it the cash-on-cash return multiple above 1x or the IRR above a target amount like (20%)?

[@SteveBalaban]

Thanks for your message, John. The performance fee is usually calculated as a percentage of IRR?

[@JohnSmith-si8nz]

@@SteveBalaban thank you very much ! :)

[@sarahw7669]

Are performance fees based on the money, invested into the company by the PE firm and how much more money that generates?

[@SteveBalaban]

Hi Sarah, thanks for your question. Performance fees are based on Internal Rate of Return (IRR), a time-based metric calculated based on the cash flows of the investment.

[@Chrissiemyk]

thanks for sharing!! I learn a lot from your vid!

[@SteveBalaban]

Thanks Chrissiemyk. I appreciate your comment!

[@sarahw7669]

What is the 2% management fee and 20% performance fee based off of? Revenue? Net income? Sales?

[@SteveBalaban]

Hi Sarah, thanks for your question. Management Fees are typically based off Committed Capital. I created a previous video on Committed Capital here: kzbin.info/www/bejne/pWimqGiYirFrY6c Performance fees are based off of positive performance, usually above a hurdle rate. If the fund's returns do not exceed the hurdle rate, there will not be any performance fees paid. Does that makes sense? If you need any further clarification, please let me know here or you can email me at [e-mail]. Thanks again for your question.

[@flower.isaaac]

is it weird that im not going into the law scene but im still curious bout this?? i know i dont have the intelligence to do law or bother trying because its too late for me at this point but im still curious tho

[@johnpinheiro6211]

Steve update the ranking!!

[@burtdow4094]

are those donations tax-dedcutible? when I think of indigent educational institutions, Yale & Columbia are some of the first that come to mind, after Harvard of course.

[@Holmes89]

They sure need it. Harvard people don't have anything to eat. Columbia thought of selling drugs like the real Columbia just to make ends meet.

[@thesemantisist]

Sir, I have a question and I have searched the whole internet for it’s answer but I failed. Does the private equity firm anywhere take or give “Usury”. Now usury is the act of lending money at an interest rate.

[@g.starkiller6354]

Debt? Theres private debt funds for that. They do sometimes take it, but its depending on conditions and relationships. If a bank can supply them the needed amount of capital with better conditions they will likely take that.

[@lucatintor4896]

1:50 do you have an example of its calculation, i am not sure about the application principle. we have 8/2 rapport in both.

[@SteveBalaban]

Hi Luca, thanks for your message. Let's say look at a few scenarios catch up clause (assuming 8% hurdle rate and 20% performance fee): - fund makes 8% -> all 8% goes to the LP - fund makes 9% -> 8% to the LP & 1% to the GP - fund makes 10% -> 8% to the LP & 2% to the GP - fund makes >10% (anything more than 10%) -> 80% of upside to the LP & 20% of upside to the GP Does that make sense? Extra note: Please note that this is after the management fee has been paid (the management fee gets paid regardless of the performance)

[@lucatintor4896]

@@SteveBalaban So if the fund perform 22% the repartitions it will be 17.6% for the LP and 3.4% for the GP accordingly on the above. do you agree?

[@ryanchase5535]

So if you get a 50% return, 0% to 8% goes to the investor, 8% to 10% is split, then does any additional income go straight to the firm??

[@SteveBalaban]

Hi Ryan, thanks for writing. To clarify, if you get a 50% return, the first 8% goes to the LP (investor), the next 2% goes to the GP (PE firm), and the remaining 40% is split 32% (80% * 40%) to the LP and 8% (20% * 40%) to the GP. So, in total, the LP would get 40% (8% + 32%) and the GP would get 10% (2% + 8%). Does that make sense? Please let me know if I can clarify further. Thanks!

[@Ajaychandra538]

@@SteveBalaban please clarify furthermore

[@brian1982100]

Huge Stephen Schwarzman fan here!!

[@ThePorschefan]

x2

[@rishiraj18]

@steve : After GP'S Meet Hurdle rate , why would 2% go to them . The remaining 92% should be divided into 80:20 , right ?

[@SteveBalaban]

Hi rishiraj, thanks for your question. What I meant was that the first 8% goes to the LP, then the next 2% goes to the GP, then after that, the LP/GP will split returns 80%/20%. For example, if the investment return was $100M, the first $8M would go to the LP, the next $2M would go to the GP, then the remaining $90M would be split among the LP/GP -> $72M/$18M. So, in total the LP would get $80M ($8M + $72M) and the GP would get $20M ($2M + $18M ). In your comment where "the remaining 92% is divided in 80:20", there is no 'catch-up' clause. Your situation is also possible, but in the video, I was giving an example of a situation with a 'catch-up' clause, which is common in Private Equity. Do you have any further questions on this? Does my comment clarify your question?

[@rishiraj18]

@@SteveBalaban That's interesting. Funds in India and in US, whose PPM I have read had no catch up clause. Something to look out for. I think what would be helpful is if you can add some videos to check performance of PE funds and compare PE companies. Thank you 😊

[@illuminated2438]

There is no "should" in a fund structure. You can do whatever you want so long as it gets done.

[@macroezra]

Hi sir what about "MERCHANTS OF DEBT" book?

[@SteveBalaban]

Hi Ben, I haven't read it. Is it good?

[@BoneKrusherKate]

Could a VC invest into more mature companies or is it by law that they can only invest into smaller start up companies?

[@shuhulkaul7146]

They can, but usually the IRR is much greater for startups (cause of the associated risk). They might consider diversifying, but usually they prefer early stage companies due to high returns.

[@SteveBalaban]

The VC and investor will agree on the type of the investments that will be made (ie. stage of investment, industry, geography, etc) and the VC will follow this. The is no external law that says a VC can only invest into smaller start up companies. Does that clarify things? Do you have any further questions?

[@transcendrealestate2428]

where can someone learn more about private equity?

[@SteveBalaban]

Hi I.K., thanks for asking. Due to my love of teaching private equity, and to requests like yours, I will start offering private equity online courses in 2021 direct to people around the world. For more info, please check out my site here: training.minklearning.com/ . Thanks again!

[@visionagdao7751]

Hi sir, Are you famiiar of COT code Fee?

[@jzk2020]

no

[@abdallanemr3261]

You can communicate with you

[@kwakukumi4729]

What if they took less and allowed their share to go back to the employees of the companies they funded?

[@SteveBalaban]

Thanks for adding this, Kwaku. I think some of the most interesting agreements are the ones between GPs and the portfolio companies (more specifically, the management compensation that results in alignment with PE firms). I guess the question you are raising has to do with the fairness of the agreements (and the compensation). Is that right?

[@glorymukuna3627]

@@SteveBalaban 8