Inside the World of Private Equity: Anxiety, Elation and Sangfroid

What’s it like to work for the glam asset of the investment field? Lucrative, exhilarating, scary? A book is out that describes the ups and downs of the ever-dramatic private equity world, colorfully painting it as something between an infantry platoon in combat and a World Series champion’s locker-room celebration.

The book, Two and Twenty: How the Masters of Private Equity Always Win, taps into a widespread fascination about this field. For one, the top names in the business are famous. Think Henry Kravis, David Rubenstein, Stephen Schwarzman, Leon Black, David Bonderman. And they’re rich. Billionaire rich.

Yes, private equity may be the bomb, but lately it’s not packing the wallop it once did, as the stock market has slipped. PE exits, where the buyout firms make most of their money, have dipped: Sales of portfolio companies are down by a third in the year’s first two quarters, to around $350 billion, per Preqin data. Nonetheless, asset allocators have profited handsomely from private equity and expectations are that 2022 will be an OK year all told.

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Two and Twenty’s author, Wall Street veteran Sachin Khajuria, used to work for Apollo Global Management. He laments that not enough people understand and appreciate PE’s contribution to wealth creation. After all, he writes, the buyout biz is “the financial equivalent of turning water into wine.” The sequence: buy an underperforming company with borrowed money, turn the place around, flip it for a handsome gain.

The phrase “two and twenty,” of course, refers to the PE operators’ penchant for taking 2% of assets under management as a yearly fee and 20% of any profits. (There has been some tinkering with this formula in recent years, but the PE firms still do very well, thank you.) Despite the exit slowdown in 2022’s first half, the PE industry is in strong financial shape, boasting $3.6 trillion in dry powder, by the estimate of Bain & Company.

One part of the PE process that the author doesn’t dwell on is that layoffs often ensue when buyout firms take over a company and proceed to cut costs. In one instance, he mentions dispassionately that an anonymous PE company he calls the Firm, after taking over a plastics manufacturer, went about “slashing headcount” and imposing “harsh severance terms for the departing employees.” That’s all you get about the bloody part of the deal.

Rather, Khajuria stresses the argument that PE firms improve their target companies and inject capital into them. Plus, they do a good job for pension beneficiaries, he goes on, praising the PE folks’ “mission to serve retirement systems as a for-profit enterprise.” Indeed, in 2021, PE gained 53% for the Pennsylvania State Employees’ Retirement System, powering its 17% advance overall.

What does it take to work at PE firms? Khajuria makes a point that these outfits attract, like the Men in Black, only the best of the best. PE, he says, is “where the most talented young minds go to make their mark.” He paints a picture of a new hire at a PE firm, who discovers he and his peers “all love it, the energy of the place, the sense of purpose and achievement.”

At the same time, there’s an ever-present anxiety that something will go wrong. He recounts waking up to an e-mail from the Firm’s founder about a recent acquisition. “Sounds like a problem,” the chilling missive read. Things had gone awry with the investment; it happened to be the plastics company. The founder demanded “a crisp update within a few hours – with concrete progress.”

Khajuria contends that private equity is a subject that all should know about as it benefits retirement accounts and so much more. After all, he adds, “we all have some skin in this fascinating game.”

How Private Equity Can Ride Out the Rough Patch

How Much Private Equity Is Too Much for a Public Pension?

Tags: Acquisition, Apollo Global Management, dry powder, exits, Private Equity, Sachin Khajuria, Two and Twenty

The Teachers’ Retirement System of the State of Illinois reported investment commitments of more than $2.6 billion since August, nearly $1.5 billion of which has been earmarked for alternative investments.

The pension fund allocated $800 million to new investments within its $12.4 billion real assets portfolio, including up to $300 million to Starwood Capital Group, up to $200 million to Kohlberg Kravis and Roberts, and $300 million to Brookfield Asset Management.

Illinois TRS allocated a total of $680 million within its $10.2 billion private equity portfolio. This includes $200 million to Apollo Global Management; $150 million to Vista Equity Partners; $75 million to SK Capital Partners, and $65 million to Bessemer Venture Partners for two funds. It also set aside $50 million each to Insight Partners, True Ventures, Scale Venture Partners, and $40 million to Longitude Capital Management.

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The pension fund also earmarked $675 million in investments within its $15.4 billion income portfolio, including $400 million to Finisterre Capital, $150 million to PGIM, Inc., and $125 million to Brookfield Asset Management.

And under its $21 billion public equity portfolio, Illinois TRS committed $475 million to Schroders, and terminated a $162 million international equity small capitalization strategy of Strategic Global Advisors. Within it its $4.3 billion diversifying strategies portfolio, the pension fund reported the full redemption of $264 million from PDT Partners.

TRS also said that its long-term funded ratio rose 1.3% during fiscal year 2022 to 43.8%, despite reporting an annual investment loss of 1.17%. That is also above TRS’ average funded ratio of 40.7% over the past decade. The pension fund said that projections by consulting firm Segal show “slow but steady improvements” in the funded ratio between fiscal year 2022 and fiscal year 2045, when TRS is required by state law to have a funded ratio of at least 90%. Over the last two years, TRS funded ratio has improved by 3.3%.

“The system’s improved funded ratio is a bright spot in a challenging investment year,” Illinois TRS Chief Investment Officer Stan Rupnik said in a statement. “The TRS funded ratio improved this year primarily because of consistently positive investment returns over the last five years combined with steady state funding that for two years exceeded the statutory minimum.”