Two and Twenty
Practitioner insider on how a modern buyout firm actually earns.
Summary
Khajuria spent his career in private equity, including as a partner at Apollo, and wrote this as an insider's explanation of how the industry works and why it earns what it does.
The book is structured around composite deal narratives rather than around analysis. Each chapter follows a transaction type: a distressed credit purchase, a corporate carve-out, a take-private, an insurance transaction, and so on. Through these he explains the mechanics: how deals are sourced, how diligence is conducted under time pressure, how the debt is arranged, how operating improvements are planned and executed, and how the exit is timed.
The title refers to the fee structure, and Khajuria defends it. His argument is that the industry's returns come from work that public market investors do not do: taking control, replacing management, restructuring operations, and holding through periods when a public shareholder would sell. He argues that the alignment created by partners investing their own money in the funds is real and substantial, that the industry's returns have justified the fees historically, and that the criticism generally comes from people who have not seen the work involved.
He is candid about the culture: the hours, the intensity, the concentration of decision-making in a small number of people, and the fact that the industry recruits and rewards on a narrow set of characteristics.
The book is advocacy by a beneficiary of the system it describes. It does not engage seriously with the evidence on returns net of fees relative to public market equivalents, which is contested; with the effect of leverage on portfolio company employees and creditors; with the growth of continuation funds and other liquidity devices; or with the arguments made by critics including Ballou, also in this reference. Read it for the description of the work, which is accurate and rarely written down, and go elsewhere for the assessment.
Key takeaways 7
- Private equity returns come from taking control and changing what a business does rather than from selecting undervalued securities.
- Partners investing substantial personal capital in their own funds creates alignment that public market managers do not have.
- Deal diligence is conducted under severe time pressure, which means judgement about what matters is the binding skill.
- Debt structuring is designed at the same time as the operating plan, because the two determine each other.
- Distressed credit purchases can convert into control positions through restructuring, which is a different route to ownership.
- Exit timing is a deliberate decision made against fund life and market conditions rather than when the operating work is complete.
- The industry recruits and rewards on a narrow set of characteristics, which shapes what it is capable of doing.
Who should read it
Anyone entering private equity or allocating to it who wants an accurate description of the work, read against independent assessments of net returns.
Similar books 6
Chosen by shared topics, the entries that hold them, and the people who recommended both.
KKR from 1976 through the RJR Nabisco buyout, and what debt did to its companies.
The prosecutorial case against the industry KKR created; read as counterweight.
What private equity does to companies, workers and investor returns, critically.
The 1988 bidding war for RJR Nabisco, the largest leveraged buyout to that date.
Recommended by: Jim Collins, Mohnish Pabrai and 1 other
Harvard case studies in bankruptcy and workout situations.
Critical account of leverage and portfolio company outcomes across the big firms.
Where it sits in the reference 2
Topics