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Slim cats (Editor's Letter)

Lost amid all the furor over “fat cat” private equity GPs wallowing in tax benefits and carried interest lucre is the fact that the vast majority of private equity firms are not installing waterfalls in their lobbies, but rather carefully overseeing finite budgets.

Lost amid all the furor over “fat cat” private equity GPs wallowing in tax benefits and carried interest lucre is the fact that the vast majority of private equity firms are not installing waterfalls in their lobbies, but rather carefully overseeing finite budgets.

Granted, as the Roman numerals get larger and larger, a private equity firm is less likely to worry about keeping the lights on, given that management fees for these fortunate, multi-funded few tend to snowball. But further down the size spectrum are hundreds of newer firms, most of which have been launched with the private capital of the founders and perhaps a few external investors. These are the slim cats – the GPs who fly coach, pay themselves relatively modest salaries and age a year with each dead deal.

In this November issue of PEI Manager, we explore budgeting and GP management issues that affect firms at the young as well as mature end of the development spectrum. Rob Kotecki's “Flying feeless” article (page 23) will be of interest to anyone thinking of spinning out or launching a new firm. Before raising a debut fund, many GPs built a track record on a deal by deal basis, which means budgeting without the convenience of a quarterly management fee.

At the mature end of the spectrum are private equity firms in a position to monetize some portion of their franchises, either through selling a stake in the management company or selling the rights to points of carry in future funds. Wanching Leong spoke with some experts on the topic about the many ways that a founder may cash out, and how these decisions can affect the firm going forward (see page 20).

Lest we at PEI Manager be accused of being obsessed only with highly substantive topics, we have attempted to tackle a budgeting issue that you don't often hear discussed in public – office decorations. Have you ever walked in to the lobby of a private equity firm and thought, “I wonder if the partners had an argument about that painting.” Well, we have (see page 11).

Enjoy the issue,

By David SnowDavid.s@peimedia.com