Two and Twenty

Two and Twenty Plot Summary

Introduction

The morning sun cast long shadows across Park Avenue as David stepped through the revolving doors of the Seagram Building. His heart raced with anticipation—after years of grinding through investment banking, he had finally landed a coveted position at one of the world's most prestigious private equity firms. The building's imposing presence mirrored the industry itself: powerful, exclusive, and largely misunderstood by outsiders. As he watched a founding partner stride confidently through the lobby, commanding respect without uttering a word, David wondered what secrets lay behind the curtain of this mysterious financial powerhouse that controlled trillions of dollars and shaped entire industries. Private equity represents one of the most influential yet opaque forces in our global economy. Behind the headlines about billion-dollar deals and wealthy financiers lies a complex ecosystem that affects everything from the stores where we shop to the hospitals where we receive care. This hidden world operates on a formula known as "Two and Twenty"—where firms charge investors 2% in management fees and take 20% of profits—creating enormous wealth for a select few while promising superior returns for pension funds and institutional investors. As we explore the inner workings of this machine, we'll discover not just how deals are made, but the mindset, culture, and human dynamics that drive an industry increasingly central to our economic future.

Chapter 1: The Masters of Capital: How Private Equity Shapes Our Economy

"Sounds like a problem. Tk." The nightmare starts when I wake up: a forwarded email from the Founder at 6:21 a.m. Just two curt sentences, twenty letters, ending with his usual shorthand for "thank you." The message was brief, but it was loaded. The Founder, I realize, has read and absorbed the contents of an explosive fifty-page update memo from one of the private equity deal teams, including three thick supporting decks of legal and restructuring analysis from counsel, plus the financial model. My throat sticks as I scroll down. The materials were sent to him six hours ago. The situation is grave. The Firm has invested four hundred million dollars in the leveraged buyout of Plastix Corp, a specialty producer of high-grade chemicals used in the manufacture of aircraft, motor vehicles, and industrial components. The company's products make possible the plastics used to make airplane and car frames lighter as well as the delicate parts of laptops that get smaller with each new model. Twelve weeks after acquisition, however, the investment has soured irretrievably. The team has gone too hard and too fast in slashing headcount, and the plants are crippled by rolling strikes protesting the new owner's lack of due consultation with workers. Despite upgrading management to better-qualified executives, the company was not able to adapt adequately to disruption in its production facilities; meanwhile, major customer orders have been delayed or gone unfulfilled. With the business paralyzed, clients have started to look to healthier competitors. Before we see what happened next for the troubled Plastix deal, let's take a moment and unpack the underlying private equity mindset at play here. A private equity employee is not a salaried employee in the same way a good banker is when advising on mergers and acquisitions. They have a personal incentive for their work to succeed, in the form of equity participation in the outcome of the deal. Their compass is their true interest in the deal. It is not the ego; it is the profit that can be made for investors and for their firms. With this filter permanently switched on, their eyes are fixed on the economics—because the investment is a long-term transaction. A trade, for gain, but with an operating business and not a mere financial instrument. This delicate balance of taking personal ownership on the one hand and being dispassionate on the other hand manifests most vividly when private equity is playing defense. When a deal is going wrong, private equity bares its teeth. The range of responses to a crisis will vary among firms, but in the case of a leveraged buyout like Plastix, most deal teams will consider negotiating a grace period with the company's debtholders to make room for the investment to work through its problems. They will look to reduce costs, even if the necessary rightsizing measures are likely to be painful for the business. There will be a resolve to administer the medicine required, even if the patient finds it to be bitter. The interests of investors in private equity funds are aligned with their private equity managers because both sides are keenly awaiting their returns. Retirement systems want to pay out pension checks for their teachers, firefighters, and healthcare workers. Private equity firms want to pay themselves carried interest, their cut of profits. The reality of being chained to a frustrating investment for years is partly why discussions in the investment committee about putting money to work in the first place are so rigorous and frank. In private equity, you eat what you cook—and the industry's remarkable growth reflects how this alignment of interests creates a powerful engine for both profit and economic transformation.

Chapter 2: Running into Burning Buildings: The Art of Complex Dealmaking

"I don't love it." Our opening pitch to the investment committee falls flat when one of the most senior partners registers his lack of interest in moving forward with the deal. It isn't the premise; the Firm is enthusiastic about developing expertise in the same sector—insurance—that one of finance's most disciplined investors, Warren Buffett, used to center his holdings and make deals that were elephant-sized in scale and profit. The problem is the audacity: Investing over a billion dollars in an untested and opaque idea in a visible way, by snapping up a sizable public company when the stock market is perilously choppy and figuring out the right valuation, may be impossible. General Insurance Group is a notoriously gray company, weak on disclosure despite being publicly listed, and run at the senior level by forgettable executives who are enormously lucky that sleepy stockholders demand so little of them. The business underwrites life and property and casualty insurance through six entities in Chicago, Bermuda, and London, covering both retail customers and wholesale clients. Although the financial markets do not focus on General Insurance and its stock price is more or less stuck at the same level it has been for three years, the clear possibility of unforeseen, outsized claims that threaten the solvency of the group is hard to overlook. Every clever strategic acquirer in the insurance industry has let go of the chance to buy it. What do the Firm's deal team know that the smartest brains in this sector do not? "Remember satellites. This will be bigger." The deal partner serves an ace. Eleven years ago, when the Founder was still actively originating and executing deals himself, he worked with the same partner on the Firm's first investment in a satellite business. It was unheard of at the time for private equity to invest in the satellite industry; you could not see the assets from Earth, let alone fix them if they went wrong, and the cost of launch failure or malfunction was prohibitive. But through original thinking, painstaking due diligence, and relentless negotiation, the Founder discovered a gold mine. The Founder staked his career in the investment committee on the success of the bet, and it worked. He hit the jackpot. The deal made a profit of ten times the money invested by the private equity fund. It was a signature trade for the Firm and led to other successful deals in the satellite industry, and its rivals spent the next five years in a slow game of catch-up. The Firm has the power to act in this way, to have different objectives and one might say different standards for creditor protections and other terms, including pricing and participation in the equity, when it lends versus when it borrows. A creditor can expect a tough conversation with the Firm if seeking to accelerate or enforce its protections against a portfolio company it has lent to. Conversely, a borrower breaches a creditor protection owed to the Firm when it lends out, such as in a debt covenant, at its peril. You do not want to be in the position where the fate of your business is now in the hands of private equity that has lent to you. The Firm is in this enviable position because of its expertise and because it plays in both the borrower and the creditor sandboxes at tremendous scale. What this mindset reveals is that being a master of private equity means being drawn to complexity. Even embracing this simple trait is itself contrarian. Nowadays, most people want an app to simplify life, to make easier decisions, to "hack" their lives to save time to boost their productivity. Private equity folks run hard against this grain—because solving complex problems often yields better investment returns. They aren't looking for shortcuts. Private equity investors have an ingrained skepticism, a natural inclination to investigate, question, critique, and deconstruct. They expect wrinkles beneath the surface, and they do not trust easily when a situation looks smooth. When others flee, private equity steps in—and steps up. Through this lens, making Two and Twenty doesn't seem so outsize a reward. Perhaps taking risks others avoid, sorting complexity into order, and having the vision to see what others do not see are understandable reasons to richly reward those who consistently generate solid returns for retirees and institutions alike.

Chapter 3: The Library: Building an Information Edge in Private Equity

"It's great to see old friends—and some new friends too." The Founder makes some perfunctory opening remarks at the Firm's annual meeting of its investors in Manhattan. It is 2021. The grand conference rooms at the five-star Four Seasons Hotel on Fifth Avenue are packed, and the hotel is sold out for the two-night, three-day private event. In attendance are the Firm's partners and investment professionals as well as the CEOs and chairs of the portfolio companies that the funds are invested in, primarily through the private equity group but also across the credit, infrastructure, and real estate teams. Most of the guests have flown in especially for this event, from all over the globe. For the first time in the Firm's forty-year history, the industry executives outnumber the deal guys by five to one. This ratio is a reflection of the Firm's reach and relentless growth. Over the next fifty hours of meetings and working meals prepared by the hotel's chefs, the Firm will review the macro climate for investing, assess where it has an advantage over rivals, and revisit the performance of the funds—including the largest portfolio companies they are invested in. Group heads will present the numbers and take questions as the marketing teams film appealing snippets for the website and social media. The odd senior banker is present, invited as a reward for good investment-banking coverage of the deal folks, including making sure leverage is available when needed, especially when markets are choppy. There is a handful of friendly journalists. But for the most part this is an exclusive forum. Security is heavy; the hotel is swarming with humorless guards in dark suits and earpieces. The sidewalks outside the hotel are lined with blacked-out SUVs. Of special interest this year is a batch of sessions put together by one of the deal teams. The deal team is working on a project that would involve a two-billion-dollar carve-out of a scientific publishing business from the largest global publisher of educational textbooks for college students and research papers. The target publishes core science curriculum textbooks, study workbooks, and practice exam questions as well as academic journals in several fields, from nuclear physics to climate change to the study of pandemics. The target markets are North America and Europe. At present, the business is wholly owned by a North American conglomerate, but the parent company needs money to fund its expansion in Asia, where growth is booming. Although the science publishing division is highly cash-generative, it is low-growth and is viewed as having limited opportunity. Three years ago, the Firm's private equity fund invested in a group of for-profit law and finance colleges that successfully made the transition to online schooling, massively reducing paper and print costs and increasing flexibility and choice for students working to gain professional qualifications. The company is now likely to be sold within the next two years at a profit of more than double the purchase price. Six years earlier, the Firm's credit fund had scored another winner, exiting a home-run debt investment in a specialist publisher of textbooks and academic research for medical practitioners that had temporarily stumbled due to an accounting scandal. And, as a personal investment outside of the Firm, the Founder owns a must-read business and economics magazine that is respected all over the world. Seven executives from all of these targets have gathered in a private breakout room at the Firm's annual meeting, forming a powerful quorum to assist the Firm with its evaluation of the science publishing opportunity. Together with the Firm's deal team, the executives gathered form the Firm's working group for the deal. The deal team presents the potential investment, reviewing the seller's situation and quickly progressing to the numbers and the questions and issues that still need to be resolved. They have revenues for each unit of the science publishing division and a total operating profit line that evidences the target's contribution to the conglomerate's aggregated cash flow. But the deal team needs to estimate the division's income and cash flow statements, plus balance sheet items and working capital detail, all on a standalone basis, in order to estimate the target's ability to generate cash and pay for the high-yield acquisition debt they intend to raise in a leveraged buyout. In this chapter, we're beginning to see how the model of private equity works on the macro level. It creates a virtuous cycle for the firms that perform: intelligence, then deals, then bigger funds, then more investments, and back to intelligence. The library is a crucial component to create this cycle. For a private equity fund's investors, this is a good thing—the professionals they rely on to make investment returns can be exceptionally well informed and are often able to analyze and conclude a deal worth billions of dollars within a few months. The inevitability of having to exit an investment, one way or another, in order to make money puts more pressure on the quality and comprehensiveness of the information needed at the time the investment is made. With each investment, private equity builds on what was learned in prior deals—they are in this for the long haul, like their investors. The library gets better every day.

Chapter 4: Eating Your Own Cooking: Alignment and Ownership Mentality

"We will make at least $100 million as a partner." It is past midnight, and the two junior members of the Foodmart deal team are joking around as they work in Excel. The target company is a U.S. food retail chain, and they are updating the financial model for its leveraged buyout by the flagship private equity fund managed by the Firm. The young men are in their early and late twenties, respectively. Each was hired by the Firm after graduating from Wharton and completing two years at Goldman Sachs in the investment banking division. They are reminiscing about the orientation program speech given during their first week at the Firm by the former head of Human Resources, an impressive but insecure executive who, rumor had it, had organized his own surprise birthday parties. Though the pair works hard, they know many are skeptical of their chosen profession. At parties, some of their college friends don't hesitate to launch into the popular accusations thrown at private equity, that the deals make a lot of money but do not create much value and so forth. The deal team duo has heard the narrative many times by now, and it goes something like this: Private equity investors target vulnerable companies to buy, saddle them with debt, cut costs to the bone, and sell for a quick profit. It is financial engineering—private equity is the house flipper of the financial world. If any operating improvements are made to the business, they are superfluous to the primary goal: getting out quick for a tidy profit. Despite their limited time in private equity jobs, the young men already know that this version of events is nonsense. Every hour of their working days and nights proves it. Private equity managers do not debate business plans for companies in the investment committee that would fit on the back of a paper napkin. They do not stake investors' money or their careers on selfish schemes to extract cash and pass on the leftovers to the next buyer. They are not so naïve as to think they can charge their fees and take their profit shares on the basis of myopic, half-baked ideas. That is not the way to create a sustainable investment business, and they know it. They see it at work every day. It is 2020. The U.S. economy is weak, kept afloat by government spending and favorable policy moves by the Fed, while consumer and industrial activity gradually awaken from pandemic-induced recession. There will be little clarity on the macro picture for the economy for at least two years. The financial markets cracked during the downturn and are still healing. In this gloomy setting, the Firm acquires a food retailer serving the middle class. It makes sense; people always need to eat at home. Foodmart provides groceries and household staples at affordable prices in inexpensive cities across the country. The business, long owned by a single family, had been facing a crisis of leadership as the aging founders were looking to retire without a viable successor in the family. It also needs to modernize in response to online competition. After twelve months, it is clear that the operational changes at Foodmart are not faring so well. The deal team had anticipated some of the issues, such as dissatisfaction in communities where stores have been shuttered because the newly installed management team does not think the upmarket transition will work. The trickier problem is that affluent young people are not flocking to the refurbished stores as expected, and the data does not show any sign of improvement. There is a clear reason for this problem, and it is not going to be temporary. The food retail sector has experienced an earthquake. A direct competitor to Foodmart has been acquired in a surprise move by an online consumer goods giant, which has adopted a strategy of keeping the stores but also offering premium and basic groceries and household goods online with free delivery across the nation. What is striking about the Foodmart sketch is the big difference made by a handful of individuals running the investment. The deal team had to reassess quickly, gather data, and revise its thesis. In a rigid corporate structure, it would not have been possible to deliver such empowerment and speed for investors. The foundation of the collective incentive to succeed for both the investors and the Firm is the alignment of their economic incentives. The more investors make, the more the Firm makes and the more the investment professionals take home. So the smarter private equity managers are, the more often they get deals right and the harder they work—the more they succeed at their jobs—the more everyone gets. What private equity earns is a function of what the investors make. This is a big part of why they are laser-focused on the outcome of each investment.

Chapter 5: The Need to Win: Competitive Drive Behind Every Deal

"You're joking? How big is your fund?" The Lehman Brothers banker snarls down at his office phone, scarcely concealing his contempt at having to take a call from a counterpart at a private equity fund he has never heard of, on the other side of the globe, in Sydney, Australia. From his corner office in Midtown Manhattan, the banker has seemingly reached close to the pinnacle of a city filled with finance professionals in search of big deals, fast money, and more power. His is a world of blacked-out limousines, expensive restaurants, and bespoke suits. It is 2003, and although the credit boom hints of a harsh reckoning in the years ahead, few stop to consider the possibility. He is an expert in mergers and acquisitions, and his cherished client is the best-known of the world's New York–based leveraged buyout firms. This established American private equity shop is the front-runner among a pack of rivals seeking to acquire an enormous portfolio of communications infrastructure assets to be carved out of European Broadcast Corporation, a venerable media giant that owns the largest and most influential TV and radio stations in Europe. On the block are broadcast towers and equipment required to transmit TV and radio signals over the air through the tower network as well as processing facilities to transform the media content produced in studios into transmissible broadcasts to send to viewers and listeners. Critically, the engineers and technical support staff who have run these activities are included in the transaction sale perimeter. On the phone, however, the Aussie is deadly serious. He explains to the Lehman Brothers banker that he is the head of a new investment vehicle set up by the largest Australian investment bank—one of the top ten banks in the Asia-Pacific region. It's a start-up private equity fund, but one with huge potential and a successful heritage. Sure, the Australian investment bank and its new fund are not well known in New York or London yet, but they are demonstrably successful, having completed similar infrastructure investments in Australia, and the call to the private equity firm was to discuss partnering on the communications infrastructure deal. The equity check is likely to be eight hundred million dollars, and, back in 2003, it was not uncommon for private equity firms to share this kind of sum and work together. As part of the value add, the Australian offers access to proprietary financing technology and operating insights that, apparently, have yet to reach New York or London. He claims to have an "edge" that will help the buyout firm win. What these financiers missed was that the Aussies were there out of desperation. That's the word their leadership used to describe the aching desire they felt to come up with something novel and effective. The killer app. Often the word desperation carries a negative connotation, but in this context, it means not just the hunger to succeed but also the primordial need to win—because failure would mean their start-up efforts to succeed against the world's major private equity firms might be shut down if they did not bear fruit. The Aussie was given a limited budget to run the start-up fund, some financial rope to play with, but his bosses' patience was limited. Unlike a major private equity fund, where partners have room to explore deals and incur some broken deal costs, the Aussie was working with a strict budget and living on borrowed time. He had no brand name to hide behind and he could not hand out impressive business cards. He rode the subway and flew coach. He didn't have the luxury of waiting three years to do one good deal. He only had a smart idea. What was this idea? Put simply, the Australians, in their home market, had proven experience in investing in and financing this type of "hard asset" or "infrastructure asset." They had developed a way to present assets such as TV and mobile network towers, airports and ports, toll roads and turnpikes to potential lenders as safer than operating businesses that private equity firms typically acquire, chemicals companies and healthcare businesses and the like. They convinced lenders that the investment strategy for these assets was to hold them for the long term, at least ten years, and to extract dividends from the ample cash flow they would generate over this horizon, rather than sell them for a quick profit. Like the importance of raw intelligence and forward thinking on display with insurance investments, we can now add a dose of desperation to the traits that pave the way to long-term success for the masters of private equity. Desperation can lead to being genuinely innovative in a way that competitors would struggle to grasp. For the Australians, it was a way to put their franchise on the map. To beat the usual suspects on Wall Street and gain acceptance to the club. For them, ordinary hunger to succeed was not enough. As private equity continues to evolve, this competitive drive—this need to win at all costs—remains a defining characteristic of the industry's most successful players, fueling innovation and creating new pathways for profit in an increasingly crowded marketplace.

Chapter 6: Stacking the Deck: Creating Favorable Conditions for Success

"I have no interest in a fair fight." The Founder's words set the tone at the start of the weekly investment committee meeting. He is speaking in blunt, plain terms, and yet to the casual observer his words might seem coded. He is not talking about cheating. He is referring to the investment process the Firm excels at, the way the Firm analyzes prospective investments. He means that the odds of winning must be high, certainly in the Firm's favor, for a deal to be approved in this forum. By the point at which it reaches the committee, the investment idea must be sufficiently developed that, if approved to proceed, it is much more likely to happen than not. The deal team will have looked carefully at every material risk and opportunity, examining them if not resolving them, dispassionately and without fear. There cannot be any holes. If the professionals have done their jobs, the number of deals brought to the investment committee that fail to materialize will be limited, because the proposals are so well prepared. Failed bids and broken deal costs must be minimized. The Firm focus on investments that make money. The Founder is right to have these demands, of course. The teams are paid to examine deals and make the solid ones happen—and then execute them well. The Firm has forty years of experience; it has made one hundred investments and has performed well ninety times—having exited already or being positioned in line for a profitable exit in a few years, where the return adequately compensates for the risks being taken. The remaining ten are either mistakes, returning nothing to investors, or deals where the future looks challenging but it's too early to tell the likely outcome. At today's investment committee meeting at the Firm, two contrasting opportunities are under consideration: They are different in sector, geography, and risk/return—but similar in terms of how the Firm approaches them. Over the course of three hours, the committee debates searing questions in a dynamic dialog designed to peel back each of the proposed deals to their most truthful essence—and to try to put investors' money to work. The first deal, code-named Project Rubik, involves a complex mess where the seller is a crumbling and controversial empire, owned by a scandal-prone industrialist family in Asia, but the deal itself is the straightforward purchase of a healthy, desirable asset. The second deal involves Lifetrust Corp, the largest operator of nursing homes in Western Europe, where the revenue streams are highly dependent on the level of government subsidies given to families to be able to afford the care that Lifetrust provides at premium prices. The Founder signals a short break to change the subject, and asks the Human Resources team to brief the group about progress made in efforts related to diversity, climate change, and community impact. In the past six months, six press releases have been issued on these subjects. This is double the amount of the previous year and six times the number of five years ago. The Firm has evolved; it's now a multi-billion-dollar public company managing hundreds of billions of dollars of investors' money across investment strategies. It's giving back a lot more to society: education grants to local community colleges; affirmative action programs for hiring and education; home office setups for employees; plans to hire veterans in portfolio companies; refurbishment of local parks and community sports facilities; and a "Dragon's Den" style contest for entrepreneurial ideas—for the youngest, newest employees. It's a far cry from the stereotypical image of excess often heard on Wall Street about private equity. In fact, it's closer to the image of a responsible anchor of the economy, an industrial stalwart. Once the group refocuses after this interlude, the investment committee's attention turns to the second deal on the agenda. The Founder kicks the discussion off with a rhetorical question: "Have we captured the pen stroke risk?" This refers to the possibility that a change in government regulations—executed via the "stroke of a pen"—can radically change the parameters of an investment. The Founder's question cuts to the heart of the proposition and is more relevant than price. Even at a lower valuation than the Asian fund paid, the investment relies on an evolving set of risks that, although possible to model as different scenarios, are difficult to assign reasonable probabilities to. The Firm does not gamble on which case might be right or blend probable outcomes, and it has little interest in unprincipled bets. In this chapter, we've seen how the masters of private equity systematically create favorable conditions for success. They don't just hope to win; they stack the deck in their favor through rigorous analysis, information advantages, and a disciplined approach to risk. This methodical preparation—combined with the willingness to walk away from deals that don't meet their strict criteria—helps explain why the best firms consistently outperform the market. By creating an environment where success is the most likely outcome, they transform what looks like luck to outsiders into a repeatable formula for generating returns that keep pension funds and institutional investors coming back for more.

Chapter 7: The Age of Big Finance: Private Equity's Growing Influence

"They failed to evolve." These four words from the deal partner in the investment committee serve as a cutting indictment of one of the Firm's rivals. Madison Stone was established during meetings at the Four Seasons hotel on East 57th Street in Manhattan in the same year that the Founder left a leading investment bank on Wall Street to set up the Firm. But unlike the Firm, Madison Stone still looks much like it always has, despite its outward success over the last thirty years. It only invests in leveraged buyouts, it has not ventured much overseas, and it is reliant on a narrow set of U.S. pension funds for capital commitments. Madison Stone's founders look a little like portraits from a 1990s movie about Wall Street, and although they genuinely care about greater diversity in their ranks, just ten percent of the partners are nonwhite. The tipping point came six months earlier, when the original chemistry among Madison Stone's three founding partners started to falter. The triumvirate are cousins, each in their sixties, as well as co-owners. They live in a tight triangle between the Upper East Side, Midtown, and Central Park and were once held up as the model for how to maintain a rock-solid professional bond in a notoriously demanding industry. All of that collapsed over the thorny issue of succession, when one member of the aging trio refused to change the "key employee" provisions in Madison Stone's fund agreements with its investors. These provisions specify the most important people at the firm, individuals without whom the business might not be able to function at all. The provisions recognize the reliance of the investors on a handful of individuals—no matter how large and established the organization—and in Madison Stone's case, they were due to be updated with new names in addition to the three founders, to reflect the senior partners who were in line to be handed the reins within three years. One of the founders had other ideas and said he was not ready to set his retirement plans just yet. The firm's partnership was aghast at his obstinance, and within twelve weeks, all of Madison Stone's brightest stars had left to join rivals or start their own firms. They didn't mind the lengthy non-compete clauses or the temporary hit on their compensation—each partner was worth over a hundred million dollars. They resented the glass ceiling, and they wanted out. The talent crater widened, as top investment professionals at competing firms, repelled by the negative internal dynamics at Madison Stone, declined headhunters' calls to consider moving there. Inevitably, the funds' investment performance dropped markedly. As the prognosis worsened, the funds' investors invoked an emergency clause in the fund agreements to call a vote to replace Madison Stone as the manager of their money, citing its inability to function effectively, and in a late-night emergency session overseen by counsel, the investors agreed to remove the firm once a more suitable active asset manager could be found to manage the assets already acquired by the firm's funds. At this juncture, a representative of the investors' special committee calls a deal partner at the Firm to pitch for the role. The partner can't help but smile as he takes in the request. The way the special committee representative describes Madison Stone even makes the partner chuckle. What a mess they are in, the partner muses. The special committee believes that the Firm is one of a handful of suitable candidates to run off Madison Stone's funds. The partner agrees to revert after consulting with the Firm's investment committee. The Firm decides to pitch for the role. Ten days later, the partner meets with the special committee to provide a comparison between the Firm's trajectory over the past thirty years and that of Madison Stone. It is clear to the special committee that although the two firms were founded in the same year, the Firm is light-years ahead. From the outside looking in, it can be tempting to think of all private equity firms as pretty much identical, with similar ways of making money for investors. In reality, nothing could be further from the truth in the industry today. The best private equity firms can boast not only edge but evolution. The major firms have realized that just doing one thing—even at greater scale—is not going to keep them winning on deals, growing assets under management, or cementing their relationships with investors. It might work for a while, but the competitive pressures of the industry mean that to win, you have to have more to your game. The reality is that private equity has evolved so much that it is now mainstream. The leading firms are gigantic, mainstream, active asset managers of capital—much of it, ultimately, money belonging to retirees—across multiple investment strategies. We even can coin a handy acronym, MAAM, to summarize them: Mainstream Active Asset Managers. These MAAM are led and run by relatively small sets of "key employees"—key individuals. Some firms have massive credit and lending businesses; some have major insurance entities; some manage prominent real estate investment funds. Alongside their private equity funds, there's a lot to like. Thanks to this investment performance, the reliance of retirement systems and other investors on these masters of private equity—these individuals—will only increase. This is why the edge they have developed so well, to evolve, is also why, over time, these firms may be recognized not only as part of the mainstream in asset management and more broadly in financial services, but something profound in our economy—they could, one day, be considered to be systemic.

Summary

Private equity represents one of the most transformative forces in modern finance, yet remains largely misunderstood by the general public. At its core, the industry operates on a deceptively simple formula—Two and Twenty—but behind this arrangement lies a complex ecosystem driven by extraordinary individuals with unique mindsets. These masters of private equity share common traits: they embrace complexity when others flee from it, they maintain unwavering focus on results, they build vast information networks that provide crucial competitive advantages, and they possess an almost primal need to win. Their success isn't accidental; it's methodically engineered through rigorous processes that stack the odds in their favor. What makes this industry so fascinating isn't just the enormous wealth it generates, but how it has evolved from a niche financial strategy into a mainstream economic powerhouse that shapes industries, employs millions, and increasingly determines the financial security of retirees worldwide. The best firms have transformed themselves from simple leveraged buyout shops into diversified asset managers with tentacles reaching into every corner of the global economy. As we've seen through numerous examples, from rescuing troubled chemical manufacturers to revolutionizing infrastructure investing, private equity thrives by seeing opportunity where others see only chaos. For better or worse, we are all increasingly connected to this financial machine—whether through our pension funds, the companies we patronize, or the broader economic currents it influences. Understanding how it works, and the remarkable individuals who drive it, isn't just an academic exercise—it's essential knowledge for navigating our financial future in the age of big finance.

About Author

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Sachin Khajuria

Sachin Khajuria is a former partner at Apollo, one of the world's largest alternative asset management firms, and is also an investor in funds managed by Blackstone and Carlyle, among other investment firms. He has twenty-five years of investment and finance experience. Sachin holds two degrees in economics from the University of Cambridge. He divides his time between New York, Switzerland, and London.

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