In order to understand why, we should address the framework of the private collateral industry first. Because a PE firm normally acts as the general partner of each of the funds it raises, financial sponsors tend to be known as General Partners or GPs in the trade. The material point concerning traditional financial sponsors, however, is that as the professionals who do the ongoing work have a home in those entities, the companies themselves have very little assets or money of their own. The amount of money, and the investments it enables, reside legally in the private equity funds which the general partners manage for their limited partners.
1 billion finance), and 20% “carried interest,” which portions to a 20% stake in the gains earned by the investments in the fund, after the management charge and certain preferred returns are paid to the LPs. 10 billion, can in fact make very good money just from management fees only. In fact, PE funds themselves really only become accounting entities for the assortment of portfolio investments within them. Therefore, you can see that notwithstanding the often substantial debt private equity companies take on in their investments, this leverage resides in carefully walled-off buckets at the amount of each individual investment.
If things go wrong with one company, it craters, but its cratering does not result in a domino impact within any particular PE fund’s portfolio, nor will it cause stress and financial contagion at the sponsor level. In almost all instances, neither … Read more