Name: Two and Twenty
Rating: 4.5 (397 reviews)
Author: Sachin Khajuria

What’s in it for me? A backstage pass to the world of private equity.

We all love rags-to-riches tales. They inspire fantasies not just of plenty, but of hope. If someone else can turn nothing into abundance, perhaps we can too.

Yet the bulk of us sour when the rich become richer. We hear about founders and partners jetting about in private planes and earning salaries in the hundreds of millions – all by leveraging investments that aren’t their own – and it just doesn’t seem fair. In fact, it feels undeserved and selfish. It’s attitudes like these that have given private equity a bad rap.

But on what basis are these hard feelings being formed? And are they justified? Because when it comes to private equity, most people don’t actually know what goes on behind the scenes – or what it really takes to be successful in the field. And curiously, most of us don’t even realize just how tied to private equity we already are, whether or not we have investments.

This Blink to Sachin Khajuria’s Two and Twenty is your backstage pass into the world of private equity. Find out what it is, how it works, and what it takes to succeed in this specialized, secretive financial field.

Private equity is extreme asset flipping.

You’ve probably seen those real estate “flip” shows on TV – the ones where an aesthetically pleasing couple buy a run-down property in an up-and-coming suburb. Over the course of an hour, you watch them demolish a wall here, build a deck there, and encounter a few hiccups like bad weather or unexpected costs. As the episode nears its end, you’re given a virtual tour of a slick new property, complete with designer furnishings and impressive landscaping. Then the auction begins. The house sells for a huge profit, and the couple is flush with cash, ready to seek out their next project.

In a way, private equity is the same – only the stakes are much, much higher. And, of course, instead of playing with a few hundred thousand dollars, you’re flipping assets worth millions.

So, what exactly is private equity?

In simple terms, private equity is a type of financial investment, in the same way that buying shares or putting savings in a high-interest account are types of investments. People use private equity to turn the money they have into even more money.

Sounds great, right? Especially if you’re someone who doesn’t have a regular paycheck, like a retiree. You want the money you have to support you for as long as possible, by multiplying as much as possible.

But one thing that distinguishes private equity from other types of financial investments is risk. First, you need a huge chunk of money to play this game – much more than if you were just buying a few shares independently. Why? Well, private equity typically involves flipping entire companies. These companies are usually in a state of crisis: they’re facing bankruptcy, or they’ve lost the bulk of their customers to competitors, or they’ve failed to modernize and can’t deliver anymore.

You might be wondering why anyone would invest in a company like that. The reason is potential. A private equity firm is one that makes investments on behalf of other organizations who represent individuals – like pension funds. The firm will see the ailing company as an opportunity. Its dire circumstances will make it cheap to purchase, and the firm will have an expert team who can guide it back to health – like those house-flippers who turn a dump into a palace. But even more than that, the team will transform the company into a business opportunity that the market salivates over. At the right moment, the firm will sell and walk away with double or triple what they paid. They win, the company wins, and, most importantly, the private investors that the firm represents win.

So, why is this risky?

Well, again, you need a lot of money in the pot to not only purchase an ailing company, but nurture it back to health over several years. That money, don’t forget, often belongs to retirees living on a fixed income. And unlike the stock exchange, where you can buy or sell at any time, investors can’t withdraw their money from a private equity investment scheme for an agreed period of time. This timeframe will be years – long enough to get the ailing company back on its feet. Finally, there’s always the risk that the flipped company won’t become profitable and gain a high purchase price, in which case the investment might only break even – or worse, it could sell for a loss. So, while private equity reaps investors high returns when it’s a success, when it fails, it fails dramatically.

But it’s the promise of those high rewards – and maybe even the adrenaline rush of those high stakes – that make private equity so tempting for investors and professionals alike.

Private equity is the hottest gig in town.

There’s a lot of buzz around private equity, and most of it has to do with money. Let’s look at some figures so you can appreciate why.

In the past decade, private equity has doubled to become a $12 trillion industry. Yep – that’s right. Not million, not billion – trillion. And in the decade ahead, it’s likely to double again.

Private equity firms are worlds away from Wall Street.

Let’s take a quick tour through a typical private equity firm so you can get a sense of how they operate.

A career in private equity isn’t mainstream – it’s elite – and everything about it reflects this. We’ll dig a bit deeper into what makes it so elite soon, but let’s just focus on the basics for now.

Only the elite become private equity masters.

Let’s use a fictional sketch to explore what it takes to be successful in the world of private equity.

Let’s say you’ve just landed a job as an associate in a top-tier firm. First – congratulations! You’ve just come to the end of a 12-month interview process, which has included two months of secret meetings with 20 different senior investment partners who’ve drilled you in every aspect of the industry. And you’ve been doing this while holding down a job as a financial analyst at Goldman Sachs – which you landed two years ago after graduating at the top of your class at Wharton. The punishing hours you’ve been putting in are just a taste of your new career path. It’ll demand that you work until midnight most nights – lucky there’s that well-stocked kitchen in your office – and you’ll typically work most weekends too. Good thing you’re ambitious and hardworking. You’re going to need to keep your eye on the prize.

Kernaussagen in Two and Twenty