Part 1: Introduction to Private Equity

Thrive Resources Blog Series: Private Equity is Not a Black Box

A regular part of my job consists of speaking with C-level executives coming off a PE-backed gig, usually after a successful exit, who are now looking for their next opportunity. I’d say about 75-80% of the time, even upon exit, they still don’t know that much about private equity in the bigger picture. Most are familiar with how it works in general, and each of them know the specific private equity firm they worked for, but they don’t feel networked into the industry, or even a “part of” the industry, and many have questions they haven’t been able to ask. I’m guessing they feel they should already know the answers so they don’t ask and then are left to their own devices to research online and talk to friends, gleaning what they can. It’s not a complete picture without an insider’s view.  

To celebrate Thrive’s 13th year this month as a top talent advisor to the private equity space, we have decided to launch a series, a resource, for all of those people who don’t want to ask the silly questions, because they are in fact, not silly at all. I encourage dialogue and offer you all a confidential space to reach out and ask any questions you have. If we don’t know the answer, we will tap into our network to find out.

Some have questions about how private equity works and some about their situation personally. We give a lot of compensation guidance so executives know what is in bounds to ask for and what is not common. We help executives to think about things in a different way and how to understand how people from the PE industry think. We also coach them on how to approach private equity firms successfully. And as a result, we are very well-networked in the executive space, producing speedy and exceptionally high quality hires for private equity and portfolio company clients.

SO, the basics - private equity is simply (and not so simply!) an asset class. When Insurance Companies, Pension Funds, Endowments, Family Offices, Sovereign Funds, Non-Profits, and wealthy individuals are looking to invest their money to generate returns, private equity is one of their options. The people/firms with the money to invest are the “Limited Partners”, or LPs. Even though private equity firms want to make great returns so they can successfully raise their next fund, at the end of the day, it’s really about the Limited Partners achieving better returns in this asset class than they can in another. It’s about the retired teachers, firemen, police officers, and other hard-working folks whom have entrusted their retirement savings to their pension fund managers, and people like you and me who rely on our insurance companies to be there when we need them. If the PE firm does well, everyone does well. If they don’t, well, they usually end up going out of business and the LPs take losses; this translates into real retirement income losses, or lost scholarships, or increased insurance premiums. This is part of why there has been more and more interest in industry regulation and why so much effort is put into assessing the quality of the teams running the private equity firms - known as the “General Partners” or “GPs”, their track records, their strategy, their leadership, etc. I always tell executives to ask questions when considering aligning with a PE firm - is this a flagship fund or have they been around the block? Do they have consistency in their investors from fund to fund? Do they have a sound strategy or do they shift focus/industries from fund to fund? What are their returns?  

To understand the scale and impact of private equity on our economy - it is massive as per the Economic contribution of the US private equity sector in 2020 as prepared for the American Investment Council in May 2021:   

“In 2020, the US private equity sector included approximately 4,500 private equity firms and 16,000 PE-backed companies. Jobs at private equity firms are estimated to be less than 1% of US private equity sector employment.” 

Furthermore “Overall, the US private equity sector provides employment and earnings for millions of workers and contributes jobs and earnings to other sectors of the US economy that relate to private equity operations.  In 2020, the US private equity sector directly employed 11.7 million workers throughout the US economy earning $900 billion in wages and benefits and generating $1.4 trillion of GDP. Suppliers to the US private equity sector employed an additional 7.5 million workers throughout the US economy earning $500 billion in wages and benefits and generating $900 billion of GDP. The consumer spending of workers of the US private equity sector and the sector’s suppliers supported an additional 11.9 million workers throughout the US economy earning $700 billion in wages and benefits and generating $1.2 trillion of GDP.”  

In short, PE directly affects $900 BILLION in wages and benefits and indirectly affects another $500 million!! That is huge. And worth understanding. And sometimes, worth joining!

Stay tuned for how private equity firms are structured and how they make their money…

Please reach out if there is any particular question or topic you’d like to see addressed here. And remember that there are no silly questions. I look forward to hearing from many of you! Stay well and be safe.