Unlike a traditional business, which has well-defined streams of cash flow, private equity PE firms possess a diversified business model with several discrete investments. Due to this unique structure, gauging the profitability and success of a firm and its partners can be a challenge. PE firms often have billions of dollars in assets under management, but the vast majority of these funds will be utilized exclusively for direct investment in portfolio companies. Which begs the question, how do PE firms make money? There are really just two main ways:. There are two ways PE firms make money: through fees and carried .
Doing Nicely, the Private Equity Way
They take over companies, in deals funded partly with debt, and influence their decisions with the aim of reaping a gain from their equity in the buyout. Buyout funds have been demanding aggressive terms over the past several years that may help protect their interest in companies at the expense of lenders funding their deals. Debt investors are accepting fewer covenants based partly on the narrative that they too will benefit from increased flexibility for private equity owners. Covenant-lite loans, which lack safeguards protecting lenders, have surged since the financial crisis. That must be it. A corporate debt bubble, created by ten years of low interest rates, has left investors so starved for yield that they are routinely willing to accept debt agreements with weak covenants, according to DePalma. As an investor in private equity funds, Christopher Zook, founder of Houston-based multifamily office CAZ Investments, has seen up close some of the more egregious terms lenders have been willing to accept. The aggressive terms of the buyout funding show how far Wall Street will go to sell a deal, according to Zook. Blackstone declined to comment for this article. The dangers lurking in bond indentures and credit agreements might not be a problem — until a company is in trouble. Should things go wrong and the company file for bankruptcy, the equity holders may continue to see income from the non-guarantor subsidiary, while debt investors have no claim on the assets, he says. For the past seven or eight years, buyout firms have aggressively sought to eliminate lender protections to ensure their equity stakes are less at risk of being harmed, according to Manchuck. While Zook agrees debt investors may end up hurt from some riskier buyout deals, he says he likes the returns private equity provides his multifamily office. They include gains from dividends funded by debt, a strategy where a buyout firm directs a company it owns to borrow to finance the payout. Apollo, the private equity firm run by billionaire Leon Black, led an investment group that purchased EP Energy, the exploration and production assets of El Paso Corp. The new owners were quick to recoup a portion of their investment before the steep decline, directing the company to issue debt to finance the payout. Apollo declined to comment on EP Energy and its use of debt-funded dividends. It benefits the private equity owners while adding interest expense that eats into cash flow. Osterweis has avoided exploration and production companies for more than two years, he says, because they tend to lack free cash flow. Borrowers in that position can find themselves stuck with an unsustainable debt problem.
How to buy dividend stocks
Most American dividend stocks pay investors a set amount each quarter, and the top ones increase their payouts over time, so investors can build an annuity-like cash stream. Investors can also choose to reinvest dividends. Dividend stocks tend to be less volatile than growth stocks, so they can also help diversify your overall portfolio and reduce risk. Like much in the world of ETFs, dividend ETFs offer a simple and straightforward solution to getting exposure to a specific investing niche — in this case, stocks that pay a regular dividend. A safe payout should be your top consideration in buying any dividend-paying investment. Find a broadly diversified dividend ETF. No broker? Analyze the ETF. Make sure the ETF is invested in stocks also called equities , not bonds. Buy the ETF. Buy your dividend ETF and then add money to it regularly. Building a portfolio of individual dividend stocks takes time and effort, making it more complex than investing through a dividend ETF. But by picking and choosing your dividend stocks, you have the potential to personalize a portfolio and find higher dividends than in an ETF. Find a dividend-paying stock. Analyze the company. This step is probably the hardest but the most important. Analyze the safety of the dividend. What is the payout ratio? That is, what percentage of income does a company pay in dividends? The lower it is, the safer the dividend and the faster the dividend can grow over time. Decide how much stock you want to buy. However, if the stock is riskier, you might want to buy less of it and put more of your money toward safer choices. That skepticism drives down share price, and a lower share price pushes the yield ratio higher. So you get hit two ways.
When large corporations disclose how much money their top executives make each year, the companies list salary, bonus and, in many cases, stock options or grants. It can add up to tens of millions of dollars. Top executives at the publicly traded private equity firms get all that, and a whole lot. They often pocket money from a variety of additional sources that can total hundreds of millions of dollars a year.
To determine just how much money private equity titans receive, The New York Times asked Equilara board and executive data provider, to compile information from the six largest publicly traded private equity firms. The joint study captured the full picture of what the executives made based on their affiliation with their firms, including dividends on the stock they own and some extra benefits specific to private equity. A full breakdown is. In the last two years, Stephen A.
Schwarzman, the chief executive and a co-founder of the Blackstone Group, received the largest sum. He received no bonus. Hamilton E. Other prominent firms have produced big payouts as. InHenry R. Kravis and George R. As a final undertaking, Equilar scanned its broader database of companies to search for the largest executive payouts from The conclusion of the study was striking: Private equity has the best-paid executives of any major American industry.
The Times based that conclusion on a number of findings. For one thing, of the top 15 executive payouts from10 were in private equity. From every other industry tracked by Equilar, there were only five executives who reached such heights. For all the populist outrage that banks have faced over compensation, their executives make just a fraction of what private equity chiefs. And not all of the bank compensation is guaranteed. Private equity firms note that, unlike banks, many of the top executives actually founded their firms.
This is why The Times also asked Equilar to collect data from tech firms, since they, too, often have founders at the helm. Indeed, Lawrence J. Ellison, the co-founder, executive chairman and former chief executive of Oracle, collected the second largest payout in the joint study.
Schwarzman, who also made much of his money from dividends. And yet, over all, the payouts to tech executives are still far short of those in private equity.
Schwarzman and Mr. Black who are both billionaires combined. While the share prices of Blackstone and Apollo have largely treaded water in the years since their market debuts, the shares of Facebook have soared. In addition to conventional salary and executive compensation, private equity chieftains make their money in three ways:.
First, private equity firms typically issue dividend-paying shares to their investors. And since the executives are often huge holders of the stock, they collect dividends, or distributions on their partnership shares, on a quarterly basis. The private equity firms argue that their executives could retire to a beach and earn these same dividends. Of course, very few.
Most private equity executives sell their shares upon leaving their firms. And at some shops, executives collect a higher dividend than is awarded to ordinary shareholders. The top executives of private equity firms often earn a cut of these profits. An executive can either take a direct cut of the so-called carry pool or earn those quarterly dividends or distributions that are largely composed of carried. The more carried interest earned, the higher the dividend. It is worth noting some limitations of the data.
First, given that Equilar pulled data from the last few years, the study is intended as a snapshot, not a definitive accounting of net worth. Still, the methodology treated each executive consistently and calculated the entirety of the payouts. Privately-held corporations need not report compensation information.
And so, while private equity earned the biggest payouts among the largest publicly traded industries, there could be private companies or small public ones doling out even bigger paydays.
Similarly, of the thousands of private equity firms that exist, only a half dozen or so are publicly traded. As such, a private equity executive not captured within this data may make even. Even the publicly traded private equity firms do not disclose all the same information, particularly when private equity firms make money dividends comes to profits on their own funds. The publicly traded Carlyle Group, for example, no longer discloses this information.
Ares Management, however, includes both the amount of personal capital invested and the profits made on those investments. DealBook Business and Policy. There is C. Then there is private equity C. Richer Than Tech and Banking For all the populist outrage private equity firms make money dividends banks have faced over compensation, their executives make just a fraction of what private equity chiefs. Doing Nicely, the Private Equity Way In addition to conventional salary and executive compensation, private equity chieftains make their money in three ways: First, private equity firms typically issue dividend-paying shares to their investors.
Limits of the Data It is worth noting some limitations of the data.
Richer Than Tech and Banking
A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Why do people buy mutual funds? What types of mutual funds are there? What are the benefits and risks of mutual funds? How to buy and sell mutual funds Understanding fees Avoiding fraud Additional information. Mutual funds are a popular choice among investors because they generally offer the following features:. Most mutual funds fall into one of four main categories — money market funds, bond funds, stock funds, and target date funds. Each private equity firms make money dividends has different features, risks, and rewards. Mutual funds offer professional investment management and potential diversification. They also offer three ways to earn money:. All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.