Data is Fuel for Private Equity in the Digital Era (2022)

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Private equity funds are coming to understand the high value of data and business analytics. As institutional capital flows more readily into the private capital sphere, stakeholders are demanding greater transparency in reporting standards and more insight into valuation processes.

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The Private Equity industry is rapidly realizing how invaluable data is to effectively drive decision making concerning portfolio company monitoring and acquisition due diligence. Tech giants like Google and Facebook have shown the value that can be accrued through data and information. Proper leverage of data can lead to more risk-averse, and higher grossing, decision-making. Data is found in each step of work that a PE firm faces, so being able to gather larger groups of data for more advanced manipulation will provide a more efficient and profitable business. However, while data is the topic of conversation in the PE markets, the question of whether sufficient infrastructure exists in order to realize the quality needed to drive a more informed investment theses is still up in the air. Many firms who are looking to utilize data analytics to derive more substantial investment rationale will require infrastructure upgrades in order to realize the true potential of their data.

The type of data required to drive analytical functions in private equity is often market and industry-specific, unique in nature and can typically be considered a commodity. In a field that is rigorously competitive and, in recent years, has seen a significant uptick in investor demand for better performing deals and asset classes, access to better quality data can give firms a viable upper hand in this quest for enhanced returns. Access to data can arm fund managers with the tools needed to rapidly complete the due diligence process and more successfully manage existing portfolio companies.

As technology grows at an exponential rate, some of the more common burdens investors are faced with when researching prospective deals are now being slowly automated and integrated with advanced data processing tools. According to The Wall Street Journal, 77% of PE executives conducted due diligence data analytics, while 68% utilized it during negotiations[1]. As more data analytic tools are being introduced, reports indicate that private equity firms are behind on the adoption curve given that they are hesitant to adopting technology they believe is “unproven.” It is fair to assume that there is an additional knowledge barrier PE firms would need to hurdle, lacking the skills necessary to transition out of legacy systems will likely exist as another obstacle moving forward as data science progresses.

Private equity firms have their ears open to the digital revolution and opportunities exist to completely transform their digital landscape, by providing them with new tools to aggregate their data and upgrade their existing infrastructures to properly collect information generated through operations in order to drive more analytically focused and sophisticated investment decisions predicated upon this knowledge.

More Data, More Scope for Refinement

The sheer amount of data created over an annual basis throughout the world is incredible in magnitude, to say the least. In 2020 alone, in excess of 15.5 Zettabytes of data were created (this is equivalent to 15.5 Trillion Gigabytes)[2], which leads to the compelling question, of whether companies in the private equity industry (whether firms or their portfolio companies) are optimally refining this data in order to drive their decision making processes. Private equity firms are confronted with rising pressure to utilize both data generated from operations and industry on two fronts—Internally and externally. Without the ability to analyze vast and rapidly growing volumes of data in order to make more informed decisions regarding acquisitions, private equity firms may find them at a disadvantage relative to their peers. On an introspective note, firm management needs to understand the value of their data generated through internal operations and how this might affect the information provided to investors and key stakeholders.

Data is Fuel for Private Equity in the Digital Era (4)

While the attractiveness of data analytics continues to drive PE firms to reconsider the way they form decisions about portfolio companies and throughout the due diligence process, many firms have not made any advancements towards their infrastructure, disabling them from seeing the possible upside from this technology. 30% of PE firms surveyed believe that in the past 12 months [3], they have seen no further importance towards analytics in their work, whereas the other 70% have seen some additional sense of importance for analytics within their work[4]. Additionally, PE firms have seen more success and greater development towards their performance analysis with the implementation of advanced data analytics, like machine learning and AI. These tools have been found most valuable for PE firms within performance analysis, back-office management, portfolio management, and risk management, respective of effectiveness. 20% of surveyed PE firms have seen a high level of effectiveness with advanced data analytics implemented within performance analysis[5].

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Data is Fuel for Private Equity in the Digital Era (5)

Regulation and the Call for Enhanced Reporting

ESG (Environmental, Social and Governance) metrics have received a particular call-out by Institutional investors (pension funds and the like) for increased outlay in investor statements and it is up to private equity management in order to figure out how to best collate this information from the raw data generated through portfolio operations. ESG assets account to around one-third of investment AUM in the United States[6] and have become a matter of critical interest in determining investment theses and evaluation.

The collection of ESG information is difficult in nature, as methodologies differ in its measurement across industries, subscribing entities and management teams. With the plethora of data available and differing standards of measurement, PE firms and their management can often feel at a loss with regard to how to aggregate a collection of data sourced from a variety of different channels coherently and in a usable format.

Data is Fuel for Private Equity in the Digital Era (6)

ESG factors are becoming more mandated as time progresses, especially with energy funds, as they are more directly tied to possible environmental changes. Being able to collect and analyze ESG data, to create metrics easily able to be equated to a monetary amount – also known as “material metrics” – is a goal for PE firms moving forward, as investors are becoming more conscious towards the risks that can occur within the ESG space. The European Union is already creating sweeping rules towards having more transparency within European funds, as well as US fund managers that market funds in the EU, with the EU Sustainable Finance Disclosure Regulation taken into effect last March 10th. It is bound to occur that similar regulations will eventually take place in the US, and private equity firms should be ready when that occurs.

According to a study conducted by EY[7], although the majority of PE firms have tools that standardize reporting throughout their portfolio, less than 25% can use these same tools for valuing their portfolio for potential buyers. Not only do these analytics save time and hassle with creating financial reports, but they will improve the insights to executives to improve their compliance and the perspective that investors have on one’s portfolio.

In the wake of the 2008 Great Financial Crisis, increased cries for regulation and the US government’s mandate of reporting initiatives such as the Dodd Frank and Foreign Account Tax Compliance Acts have made regulatory compliance much more structured and costly for financial institutions to uphold their commitment to. Heightened compliance and regulation are speculated to be an ongoing trend as the financial markets (and particularly private capital) grow more far-reaching and sophisticated in nature and face an influx of offshore funds from overseas investors.

A study from Vistra.com shows that PE firms understand the value of data into the forthcoming years, with 85% of LP’s surveyed view it to be a major enabler of change. However, as it becomes necessary to adapt and stay updated, what are PE firms’ options regarding this change? They can build out new systems, buy out a software company, or acquire an outsource from a third party vendor, but these options become more limited when regarding small to midsize firms. Smaller firms would struggle with the capital-intensive internal investment as well as the pertinent issues for scaling. In Vistra’s study, 55% of correspondents believe that outsourcing to a third party was the preferred method of creating solutions for better data management. Furthermore, once that issue is solved, the next hurdle appears. With digitally enhanced internal systems, firms would have to worry about the oncoming threat of cybersecurity, which many view to be the most prominent threat for the next 3 – 6 years[8].

As funds weigh on the various impacts of increased regulation and heightened demands from investors and institutional managers alike, a record 1.9 trillion USD in dry powder[9] has raised battle cries for heightened investment activity from stakeholders, who are readily resulting in higher acquisition bids and stark competition amongst industry players. The ability to effectively amalgamate portfolios and industry data into more optimized, decision-driving information will undoubtedly continue as a key trend as fund management teams weigh on their existing toolkits and infrastructure to strive for competitive advantage. Funds can seek to improve the speed in which they gather, structure and analyze portfolio and market data through automation, a proven methodology for heightening efficiency in the financial services sector.

What’s Next for Data-Driven Investing in Private Equity?

Data-powered investment is the future for the private capital industry, and the movement can be personified through the activity of firms such as Two Six Capital—an innovative fund which has been involved in over 27 billion USD worth of transactions since the group’s inception in 2013[10].

Transactional due diligence, in recent years has put the spotlight on data-driven methods of decision making in the private equity industry and the ability to better understand, calculate, and forecast the post-merger value creation possible through various acquisitions are critical aspects of the new paradigm for analytics-driven investment theory. Cited in a University of Pennsylvania article, Two Six Capital’s usage of “large-scale, cloud-based engineering” enables the fund to analyze massive datasets in short timeframes and under a variety of lenses. The nimbleness of cloud-based software and relative affordability of the tools lends itself to practical deployment—hands-on platforms which can be deployed by IT teams even at smaller firms entering the market with lower assets under management. It is clear that analytical cloud solutions have the potential to be an economical back-end driver of due diligence operations. As well, the standard, pay-as-you-go, SaaS (Software as a Service) aspect to cloud facilities means that funds of all sizes and structures have the ability to tailor their usage and expenditure around the solutions as their needs evolve and the potential transactions needing full analysis develop in scale and magnitude.

Funds are often limited by the amount of bandwidth their staff has in order to spread their time across deal analysis and the timeframes for the typical due diligence process lasts around four to six weeks to analyze a potential transaction[11] . Through deploying advanced statistical machine learning algorithms in order to better analyze customer data through cloud solutions, companies more thoroughly understand projected and current growth rates than before, rather than relying on standardized and adapted growth formulas that may have more traditionally been used throughout the analysis processes. Tracking and timing customer intake for potential acquisition targets that operate throughout varying geographical areas can provide further insight into how lucrative certain market segments are, and whether they may be worth investing in post-acquisition.

Funds have relied on spreadsheets via Excel and other common tools in order to build their analysis, which initially brought significant evolution to the degree of productivity capable of being achieved by private equity staff, but models are still maintained mostly by humans and error can occur. Introducing enterprise-wide spreadsheet management software can enable due diligence teams to link their existing sheets for further data drill-down and develop more efficient channels through which to intake raw data for analysis.

A Cultural Mindset Change is Critical

In closing, a well-grounded understanding of data analysis, AI and machine learning is emerging as a critical characteristic of the innovative private workforce. As Two Six Capital’s success in streamlining their due diligence and portfolio company monitoring process has illustrated[12], a shift to new enterprise tools may signal an innovation-centric shift from long-staling analysis processes, driven mainly by fundamental spreadsheet-driven forecasts and projections, often prone to error. As machine learning, AI and cloud solutions develop and the tools available to private equity investors begin to see upgrades in their usability and accessibility, hiring teams who understand the demand for the recruitment and retainment of employees who possess skills rooted in an analytics-driven approach to investment will be crucial in cultivating a culture dedicated to pushing their organizations to the forefront of data-driven investing.

While data analytics approaches exist and tools are readily available for funds, management must understand how to tailor their workforce recruiting to target individuals who have proven experience in pragmatically deploying these tools and amalgamating massive datasets in order to come to conclusions which will put them ahead in an industry plagued by stiff competition in recent years. As the inflow of institutional capital continues to overwhelm an industry with a record 1.6 Trillion in dry powder[13], data-driven investing may be the key that general partners are looking for in order to gain an edge and allocate investor capital.

How Sia Partners Can Help

Sia Partners’ deep experience across finance organizations with data and technology platforms positions us well to assist your company in employing effective data management practices, to include developing centralized data warehouses. From creating governance frameworks and target operating models, to complex systems and data integrations, we offer a wide range of solutions to address the full spectrum of our clients’ data management needs.

Our data management offering can assist in defining data models and processes to ensure centralized availability and homogeneous quality of data through your organization, priming your data for analytical utilization and fueling enhanced management decision making. We are also positioned to assist in achieving optimal data quality, developing tailored data models, refining data validation and controls and leveraging monitoring tools for internal data sets. Sia Partners can additionally deploy business process automation tools in order to expedite manually performed operational tasks, resulting in cost reduction. If you are interested in smarter reporting and analytics at your organization, reach out to us regarding our offering towards data visualization and reusable libraries for modeling via modern and best-in-class analytical solutions.

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FAQs

What is private equity data? ›

The Private Equity dataset provides insight into current investment criteria and areas of interest for public and private investment firms, public and private funds and investment arms. This dataset can be used to find investment opportunities.

What metrics do private equity firms use? ›

Performance in private equity investing can be measured using the internal rate of return (IRR), the multiple of money (MoM), and the public market equivalent (PME). But, while IRR, MoM and PME are widely used metrics, they do have some limitations as methodologies in evaluating PE funds' performance.

What are GPS and LPs in private equity? ›

A private equity firm is called a general partner (GP) and its investors that commit capital are called limited partners (LPs). Limited partners generally consist of pension funds, institutional accounts and wealthy individuals.

What is private equity infrastructure? ›

Infrastructure Private Equity – This term refers to investing in the equity of infrastructure assets to gain ownership and control. There are dedicated infra PE firms, but plenty of pensions, large banks, SWFs, and other entities also make “equity investments in infrastructure.”

Does Bloomberg cover private equity? ›

Bloomberg offers a fully-integrated solution for every stage of the Private Equity fund (PE fund) investment cycle. We have the news, data, analytics and tools to help investors get into the detail faster.

What drives private equity returns? ›

Apart from the highly significant impact of fund inflows into the industry it can also be shown that private equity funds' returns are driven by market sentiment, GP's skills as well as stand-alone investment risk.

Why is private equity so popular? ›

One reason many investors find private equity so alluring: It gives them the chance to invest in the kinds of companies that have been slowly disappearing from the public market—small-cap stocks with large-cap potential.

How do you measure equity performance? ›

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company's assets minus its debt, ROE is considered the return on net assets.

What is a waterfall in private equity? ›

A distribution waterfall is a way to allocate investment returns or capital gains among participants of a group or pooled investment. Commonly associated with private equity funds, the distribution waterfall defines the pecking order in which distributions are allocated to limited and general partners.

Can an LP also be a GP? ›

The key advantage to an LP, at least for limited partners, is that their personal liability is limited. They are only responsible for the amount invested in the LP. These entities can be used by GPs when looking to raise capital for investment. Many hedge funds and real estate investment partnerships are set up as LPs.

What are the economics between GPs and LPs? ›

General Partners (GPs) sponsor and manage private investment funds. They need capital to invest but demand flexibility and discretion to get the deal done. Limited Partners (LPs) are the investors committing capital to those funds.

What is super core infrastructure? ›

Brookfield Super-Core Infrastructure Partners is an infrastructure core fund managed by Brookfield Asset Management. The fund is based in Toronto, Ontario. It focuses on transporttaion, telecommunication, power, renewable energy asset class.

Which infrastructure fund is best? ›

Which are the best Sectoral-Infrastructure Mutual Funds to invest in 2022?
Fund NameFund Category5 Year Return (Annualized)
ICICI Prudential Infrastructure FundEquity13.56 % p.a.
Invesco India Infrastructure FundEquity15.26 % p.a.
Tata Infrastructure FundEquity13.3 % p.a.
2 more rows

Who is DWS infrastructure? ›

DWS is a leading fiduciary infrastructure investment manager.

What does LP stand for in Bloomberg? ›

In 1986, the company renamed itself Bloomberg L.P. (limited partnership).

What does private Equity do? ›

Private equity operates with investors and uses funds to invest in private companies or buy out public companies. By doing so, general partners can obtain control over management and other operational changes to increase profitability in hopes to later sell at a successful rate.

How many companies use Bloomberg? ›

Bloomberg covers the entire financial reporting process of companies — from earnings to preliminary releases to full fundamentals - on more than 85,000 companies (both active and inactive).

How do PE firms make money? ›

Private equity firms earn money by charging management and performance fees from investors in a fund. Private equity capital can be utilized to fund new technology, make acquisitions, and expand working capital for a business.

How much money do you need to start a private equity firm? ›

Another important factor to consider is a firm's minimum investment requirement. Historically, the standard minimum investment amount for private equity has been $25 million.

Where do private equity firms get their money? ›

Private equity firms raise money from institutional investors (e.g. pension funds, insurance companies, sovereign wealth funds and family offices) for the purpose of investing in private businesses, growing them and selling them years later, generating better returns for investors than they can reliably get from public ...

Does private equity outperform public markets? ›

From 1990 to 2010, private equity firms outperformed the S&P by 6.3%, net of fees. However, according to the American Investment Council, in the decade preceding September 2020, private equity funds generated a 14.2% median annualized return compared to annualized return of 13.7% for the S&P 500.

Is private equity still worth it? ›

Private equity is an attractive investment option for high-net-worth individuals and institutional investors because of its potential for high returns. Private equity falls under the category of alternative asset classes.

Why does private equity generate higher returns? ›

Their ability to achieve high returns is typically attributed to a number of factors: high-powered incentives both for private equity portfolio managers and for the operating managers of businesses in the portfolio; the aggressive use of debt, which provides financing and tax advantages; a determined focus on cash flow ...

Is private equity better than public equity? ›

Private equity investments are available only to high net worth and institutional investors, whereas investors of all types can own public equity. Private equity can generate greater returns, but comes with unique risks, including illiquidity, high management fees, and long holding periods.

Are private equity people happy? ›

The results echo another recent compensation study, by executive recruiting firm Heidrick & Struggles, which found that 62 percent of associates and senior associates at private equity firms were “not happy” with their salaries and bonuses.

What is private equity in simple terms? ›

Private equity refers to the debts and shares of companies that are not publicly traded on a stock exchange. The term may also refer to venture capital that is invested in newly started businesses, known as startups.

How is private equity measured? ›

The three measures of private equity performance you need to know are internal rate of return (IRR), multiple of invested capital (MOIC), and public market equivalent (PME). It's important to learn and use all three metrics in tandem because they account for the others' blind spots.

What are equity metrics? ›

An equity metric would ensure that distribution to facilities that are located in vulnerable communities or that care for residents from those communities would receive prioritized vaccine allocation, especially if and when vaccine supply is limited.

What does 2x mean in private equity? ›

(40,000 + 60,000) / 100,000 = 2

That's what it means to have an equity multiple of 2x. You've increased your original investment by a factor of 2. In other words, you've doubled your money.

Which waterfall method is better in private equity? ›

The European model is more favorable for limited partners. Sponsors may wait for years to receive a share of the profits. This increases the sponsor's risk and incentivizes them to sell investments early.

What does 2 and 20 mean in private equity? ›

"Two" means 2% of assets under management (AUM), and refers to the annual management fee charged by the hedge fund for managing assets. "Twenty" refers to the standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark.

What is a 100% catch up? ›

In practice, in a deal with a GP Catch-Up clause, the LP receives 100% of the property's cash flow until their preferred return hurdle is reached. Above the hurdle, the manager/General Partner receives 100% of the income and profits until they are “caught up” to their performance fee.

How many LPs can a fund have? ›

How Many LPs Do I Need for my Fund? The ideal number of limited partners is between 25 and 35, but some funds launch successfully with many fewer depending on ticket and fund size.

Do LPs get carried interest? ›

The typical carried interest rate charged to LPs is 20%—although some GPs can command higher rates. This means that after the LPs are repaid their original investment amount, the GPs will receive 20% of the profits from the fund, while the remaining 80% of profits are paid to the LPs.

Are LPs institutional investors? ›

Limited Partners (LPs)

The first type being institutional investors which are professional entities that invest capital on behalf of individuals or companies, such as insurance companies, pension funds and university endowments.

What is the difference between hedge funds and private equity? ›

Hedge funds are alternative investments that use pooled money and a variety of tactics to earn returns for their investors. Private equity funds invest directly in companies, by either purchasing private firms or buying a controlling interest in publicly traded companies.

What is dry powder in private equity? ›

Dry Powder is a term referring to capital committed to private investment firms that still remains unallocated. Under the specific context of the private equity industry, dry powder is a PE firm's capital commitments from its limited partners (LPs) not yet deployed into active investments.

What is the difference between private equity and asset management? ›

Essentially, asset management and private equity firms are the same. Private equity firms are a part or type of asset management firms. However, these firms differ significantly from the other asset management firms. Private equity firms take a more specialized approach to investing compared to asset management firms.

Are infrastructure funds private equity? ›

An infrastructure fund is simply a form of sector-specialised private equity fund that only invests in infrastructure - in much the same way as a venture capital fund might only invest in technology.

What are core plus infrastructure assets? ›

Core-plus infrastructure still primarily consists of brownfield assets. These assets are typically less monopolistic than core infrastructure and may include a growth/GDP- linked component or some other form of asset or contract optimization.

What asset class is infrastructure? ›

What Is Infrastructure? Infrastructure as an alternative asset class encompasses investment in the facilities, services, and installations considered essential to the functioning and economic productivity of a society.

What is the best ETF for infrastructure? ›

The infrastructure exchange-traded funds (ETFs) with the best one-year trailing total returns are GII, IGF, and IFRA. The top holdings of these ETFs are NextEra Energy Inc.

Does Vanguard have a infrastructure fund? ›

Vanguard Global Infrastructure Index ETF.

Should we invest in infrastructure mutual funds? ›

For any growing economy, investments in infrastructure are the key to future growth. It is estimated that high quality infrastructure in the form of quality roads, highways, inland waterways, ports and airports will boost the GDP growth by 1.5-2.0% annually.

Is DWS owned by Deutsche Bank? ›

Deutsche Bank, which retained majority ownership of DWS after its initial public offering, has marketed itself as bank companies can turn to as they seek a greener future.

Is DWS a hedge fund? ›

DWS Group (Global Hedge Fund Business) General Information

Operator of a hedge fund business. The business unit provides investors with access to liquid alternative investment strategies in regulated Ucits funds through the DB platinum fund range.

Where is DWS based? ›

Frankfurt , Germany

What is private equity in simple terms? ›

Private equity refers to the debts and shares of companies that are not publicly traded on a stock exchange. The term may also refer to venture capital that is invested in newly started businesses, known as startups.

What is private equity with example? ›

Private equity is the category of capital investments made into private companies. These companies aren't listed on a public exchange, such as the New York Stock Exchange. As such, investing in them is considered an alternative.

What do private equity firms do? ›

Private equity firms invest the money they collect on behalf of the fund's investors, usually by taking controlling stakes in companies. The private equity firm then works with company executives to make the businesses — called portfolio companies — more valuable so they can sell them later at a profit.

What is the difference between hedge funds and private equity? ›

Hedge funds are alternative investments that use pooled money and a variety of tactics to earn returns for their investors. Private equity funds invest directly in companies, by either purchasing private firms or buying a controlling interest in publicly traded companies.

Why is private equity so popular? ›

One reason many investors find private equity so alluring: It gives them the chance to invest in the kinds of companies that have been slowly disappearing from the public market—small-cap stocks with large-cap potential.

Why do people go into private equity? ›

Investors seek out private equity (PE) funds to earn returns that are better than what can be achieved in public equity markets. But there may be a few things you don't understand about the industry. Read on to find out more about private equity (PE), including how it creates value and some of its key strategies.

Why do people invest in private equity? ›

Unlike direct investments in non-listed companies, you leave it to the Private Equity fund to create value. Private Equity is a key catalyst for economic development. It boosts corporate growth and job creations and helps new generations of business leaders emerge.

How does private equity make money? ›

Investment bankers make money by advising companies, structuring sales, raising capital, and taking a percentage fee on each transaction. By contrast, private equity firms make money by exiting their investments. They try to sell the companies at a much higher price than what they paid for them.

What is the difference between equity and private equity? ›

To go back to first principles, equity is a stake of a company's value. Public equity is a share in a company that is publicly traded on a stock exchange. Private equity is a stake in any company that is not publicly traded.

How many companies are owned by private equity? ›

Private equity funds invest across a range of industries such as energy, healthcare, manufacturing, retail, and technology. In 2020, the US private equity sector included approximately 4,500 private equity firms and 16,000 PE-backed companies.

Who is the largest private equity firm? ›

The Blackstone Group

Since it was founded in 1985, it has become the biggest private equity firm in the world, managing assets worth over $648 billion. It has raised an impressive $58.3 billion over the past five years.

Why is it called private equity? ›

Private equity firms are, as their name suggests, private — meaning they're owned by their founders, managers, or a limited group of investors — and not public — as in traded on the stock market.

Is Shark Tank private equity? ›

The companies on "Shark Tank" are not publicly traded, meaning they don't have equity shares or published earnings multiples for investors to consider. However, the Sharks can still use the company's profit as compared to the company's valuation from sales revenue to come up with an earnings multiple.

Who makes more money PE or hedge fund? ›

Hedge fund compensation is more variable than private equity salaries + bonuses, but at the junior levels, you'll most likely earn a bit more in private equity. At the top levels, a star hedge fund PM who has a great year could easily earn more than an MD in private equity – depending on the fund size and structure.

Why private equity is better than hedge funds? ›

Fund life is contractually defined in private equity funds, whereas there is zero limitation on funds' life in the case of hedge funds. Investors in Private equity funds have a higher level of control over operations and asset management, whereas hedge funds have a lower level of control over assets.

Can you make a lot of money in private equity? ›

Private equity is a very lucrative career. As an asset class, private equity has enjoyed tremendous success over the past decade. Investors around the globe continue to pile their money into private equity firms.

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