“Twenty-two” by a former Apollo partner

  • In Two and Twenty, a former partner at Apollo Global provides an internal analysis of private equity.
  • The author aims to defend an industry that has been heavily criticized, but fails to back up his argument with data.
  • This is an opinion column. The ideas expressed are the writer’s thoughts.

The title of a new book written by a private equity insider made me anticipate an exciting talk about all about the inner workings of the industry.

Twenty-two: How the masters of private property always winIt is the work of Sachin Khajuria, a former partner at Apollo Global, one of the world’s largest private equity firms.

The title, however – like much in Khajuria’s baffling book – is very misleading.

The term “twenty-two” refers to the mechanism by which the partners of private equity firms make their money. It consists of a 2% ongoing management fee payable on the total capital invested in the funds and a 20% performance fee associated with value appreciation in the companies the fund purchases. Those who entrust their fortunes to private equity funds get what’s left: 80% of the fund’s investment gains after management fees.

Anyone with a passing knowledge of these economies knows the answer to the semi-rhetorical question

cover twenty two

“Twenty Two: How the Masters of Private Equity Always Win” by Sachin Khajuria.

Random penguin house

How “private equity masters” always win: For larger companies, “two” out of “twenty-two” guarantee truly extraordinary wealth to partners even if the investment is performing poorly. A company with $50 billion in assets under management (AUM) will generate $1 billion in management fees each year to be shared among general partners once the expenses are covered regardless of whether there are any performance fees at all. The largest private equity firm, Blackstone, expects to reach $1 trillion in assets under management this year.

However, it turns out that Khajuria has a completely different answer

Instead, the author wants to convince readers that the reason private equity masters always win is because they’re great.

twenty two He argues that the winning mindset of the best and brightest who are attracted to private equity allows them to “always beat the market”. In addition, as the largest companies accumulate more and more assets, it makes them more efficient. This is beneficial to society, Khajuria claims because the resulting massive returns accrue “largely…to tomorrow’s retirees”.

With the explosion in the size of the sector over the past decade — managing nearly $10 trillion in assets as of last year and growing — private ownership has angered increasingly crusader lawmakers, regulators and journalists. The time is right for a book to offer a thoughtful counter-narrative defending an industry that puts private property in an appropriate context.

Unfortunately, “Two and Twenty” is not that book

Khajuria’s approach is to provide a number of assertions about the private equity industry and prove them through case studies drawn from his own experiences. But many of the book’s main claims lend themselves to a more direct approach: looking at the data.

Among the primary strengths of the largest private equity firms, according to Khajuria, is their ability to access huge caches of proprietary data. However, it does not refer to any of the huge data on publicly available private equity. This data does not support his many comprehensive claims — about consistently outperforming, fund size advantages, and more.

Sometimes Khajuria focuses only on a subset of private equity firms that are able to generate higher ROIs from the market rather than the entire industry. But the data still doesn’t support this narrower approach, as researching the fact that a company’s last fund is the winner tells you nothing about whether the next fund will be.

Failing to root the book in actual data would not be the end of the world if Khajuria provided a revealing internal report supporting his view.

And this is where Two and Twenty gets really weird

Instead of compelling anecdotes from his actual experience, we are treated to “mock sketches,” and we are told that at least some, but not all, of these anecdotes are “inspired by real-life deals and events.” Wherever it was inspired, “certain details” were hidden or altered.

Some of these changes are just weird. The site for the 2021 annual meeting of the unnamed private equity firm has been scheduled for the Four Seasons Hotel on Fifth Avenue. The Four Seasons Hotel is located at 57th Street and has been closed since March 2020. The hotel appears again later in the book at its correct address.

Even more confusingly, the facts embedded in the imaginative drawings, whether inspired or made up, often conflict with the broader picture Khajuria is trying to paint. On the one hand, he wants to correct misconceptions about the industry promoted by “some in the press,” emphasizing, for example, the “serious and visible progress” being made in areas such as diversity, sustainability and disclosure.

On the other hand, sketches often reinforce many negative preconceptions about private property practices. The founder of the company who is facing a crisis treats him with romance, but once he takes their money he will “leave the old man by the wayside if he is not on board” with their plans. The game plan for another buyout is to “shed the fat through serious negotiation with unions and suppliers” and “quickly convert it into an Asian conglomerate” at the first bullish window of opportunity.

Khajuria seems to justify some questionable practices by asserting that the spoils – after taking out the twenty-two along with a long list of other fees he mentions only in passing – are accrued to retirees through their pension fund investments.

And while he has repeatedly stressed the benefits to “the financial security of our loved ones,” he fails to point out that less sympathetic sovereign wealth funds dwarf America’s largest pensions as private equity investors. Teachers and firefighters are mentioned frequently; China and the United Arab Emirates, the largest private equity sovereign wealth investors who together account for more than all US pension funds combined, not at all.

It is difficult to disagree with Khajuria in that given the already enormous and growing influence of all forms of private capital, increasing the public’s understanding of private capital is “essential”.

Despite its ambitions, Two and Twenty makes a rather modest contribution to achieving this commendable goal.

Jonathan A. I was Professor of Professional Practice at Columbia Business School and Senior Advisor at Evercore. His most recent book isThe podium illusion: Who wins and Who loses in the age of tech giants.