So what does the private equity firm get out of this deal?
-GPs(general partners) typically receive 20% of the profit after the hurdle rate is reached. Carried interest is taxed at a lower rate than regular income.
-they measure their performance by how much cash they put into a deal and how much cash they get out. They prefer to use debt rather than cash, and like to put as little cash in as possible
-they are organized as private partnerships, so they don't pay corporate tax on capital gains from selling businesses.
-Dividend recaps : a type of leveraged recapitalization that involves the issuing of new debt by a private company, that is later used to pay a special dividend to shareholders
Moreover, private equity firms can take out additional loans through their leveraged companies to pay dividends to themselves and their investors, and the companies are on the hook for those loans too. The share of profits private equity managers earn, carried interest, gets special tax treatment, and is taxed at a lower rate than regular income.
The controversy surrounding private equity is that whatever happens to the company acquired, private equity makes money anyway. Firms generally have a 2-20 fee structure, which means they get a 2 percent management fee from their investors and then a 20 percent performance fee on the money they make from their deals.Basically, if an investment goes well, they get 20 percent of that. But regardless of what happens, they get 2 percent of the money they’re managing altogether, which is a lot. According to data from consultancy firm McKinsey, the global private equity industry’s asset value has grown to nearly $6 trillion.