Below are the steps to setting up your own Private Equity (PE) company. I have worked at multiple Private Equity firms
and have been terribly slow to catch on to the “art” of how to do this. Before starting you should read the infamous
book “The Prince” by Machiavelli, to get you in the right mood. Remember, this is about Power, Control and Take No
prisoners.
1. The Set Up. However, you do it - lying, cheating, persuading, ridiculing, maybe killing - you want to keep control
in the hands of the fewest people, just you if possible. Never give it up. Say you will in the future, and then do
not do it. It is important at this point to seem like a good person, but you know you are not. Good people do not
get rich like you want to be.
2. The Lawyer. Get a bad ass lawyer. Getting the right bad ass lawyer is critical. This person needs to get everyone
to sign an NDA (Never Divulge Anything or we’re going to sue the ever loving crap out of you and take away
everything you ever got and everything you are supposed to get…forever). The lawyer should exhibit total
devotion to the owners, like a bulldog, so much so that it feels like they would haul their own mother into court
if needed. They should tell everyone that they are doing it for their own good.
3. The Profits. Part of the secret to your success is how PE makes money. It has been called the 2 & 20 model, but
it has been changing around the last couple of years. Generally, the PE company raises a Fund and gets a 2%
Management Fee on the Assets Under Management (AUM) and then a 20% Carried Interest in the Fund assets
after the investors receive a payout of about 8%. This formula varies (the 2% can go down for bigger Funds) but
it is in the ballpark.
4. The Employees. The only thing you tell your employees is that they are going to get a part of the Carried Interest
back-in and it will make them freaking rich. Focus on freaking rich. You should run numbers that prove to them
that with your brilliant investing prowess the Carried Interest will be so humongous that even a tiny fraction will
make them rich. Then you give them tiny fractions. It is ok to do this because if their tiny fraction is worth
anything, your giant fraction is worth a freaking fortune. You are not really giving them anything because it may
not even happen.
5. The Rub. Here is the secret. Take as much of the Management Fee as you can possibly get, leaving just enough
to pay the employees a decent salary. There is huge money in this Management Fee, and you can literally get
filthy rich from it… even if you are the dumbest investor on the face of the planet! You tell the employees that
you deserve it because you have had to put up your own money as “risk” equity and you could lose it all. That
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should calm them down. The truth is that if you can get most of the management fee, it will cover everything
you put up and still give you generational wealth!
The Big Reveal. Here is another secret. No one will really know how the Fund performs for over 10 years and by
then, you will have raised the next Fund or two. It takes about 5 years to find the investments and another 5
before the investments have a conclusion. The beauty is that you can pretty much bump up the “valuations” of
the Fund for the whole time. You can make it look fantastic, even if it is a bag of crap. Few people can ever figure
out what the truth is because there are so many complicated investments. Even better is that before the
conclusion is in, you will have raised the next, and possibly even another Fund that is bigger than the first! That
means bigger Management Fees! You can do this because you have bumped up all the “valuations” to make
yourself look brilliant!
The Fear. At some point the employees may “catch on” to what the real deal is about the Management Fee. If
you have set things up right and have control, then it is time to instill fear. Fire someone. Makes sure everyone
sees it. Pick someone higher up. Make it a public execution. Total humiliation. No one will be asking about the
Management Fees again.
The Investors. Here is another secret. No one will ever question your valuations. Why you ask? The
representatives of these investors want to look like they have been real smart investing the money in your
company and the last thig they want is you writing down their investment. Also, and this is big, most will have
moved on to other companies well before the Fund conclusion and it will not matter a hill of beans to them
personally. It will only matter to all those dumb retired people they are managing money for and of course they
have no voice in this.
Win/Win. You can see now that there is only upside for you in this. Sure, you may leave a lot of disgruntled
people in the world but most of them will have NDA’s. The other things is that you will have so much money that
you can set up some type of “trust” fund that does some philanthropic thing, like dog neutering, that will make
you seem like a good person and that you didn’t really screw all the people that helped build your fortune. Kind
of like the Andrew Carnegie approach.
Well there you have it. It is simple and only a few key points. One other thing that you need for this: you must be a good
salesman. To be a good salesman, you just talk loud and confidently. It does not matter if you know what you are talking
about, if you speak loud enough and sound confident, most people will believe you. You should also throw in overly
complicated financial structures that you will use like “Tranche” and “Preferred” because everyone knows that money is
made by complicated financial structures not by good creative ideas and execution.
Good Luck!