Guest comment: High priced indolence in the megafunds

Jon Moulton, managing partner of Alchemy, on why it's not easy being chief executive of a private equity fund.

Expansion of the private equity industry is creating new problems for the megafunds.

First, some arithmetic: take a 10bn fund, with a 1.75% managing fee = 175m pa. Add deal fees of, say, 40m pa. This makes 215m pa to be dissipated around the fund's employees (and that's ignoring carried interest, exit fees and previous funds fees, which might add up to as much again).

The crucial question is... how to get rid of it?

Well, there are 10 partners, 30 other executives and 20 support people. The support people and the office only cost 4m, even including the annual investor entertainment event costs.

Only 211m to go.

The big issue now is what to do with all these professionals and all that money.

You see, most years we only do two big deals, each involving at most six of our team. An executive can easily go five years without working on a real deal and they get like a man left without female company on a desert island - sort of deal-horny and of desperate appearance.

Whilst not doing deals we make them engage in the recurrent fruitless foreplay of auction bidding - to keep them off the streets. Indeed, when we don't do this we have a lot of trouble in the local champagne bars.

We tried the alternative of sending them to regulatory courses, but the even greater feelings of personal futility induced by this were such that it would have been inhumane to continue.

So we get very unhappy people with little apparent (or, indeed, real) purpose in life. We have no choice - we have to use the money to make them happy. This enables us to get rid of maybe 400k pa in salary and to play Santa Claus with 100% bonuses. Then the executives cannot leave (this upsets investors in excess) and it still leaves us with 187m pa to get rid of.

We just have to divide this up between the 10 partners to reward them for finding the two supermen required to run each year's new deals and for the partners to deal with their personal affairs which necessarily are getting very complex as they try to spend their money. If I never hear of another private plane problem or of a new way to minimise divorce settlements it will be fine!

But the worst task, and the one really justifying the partner's own rewards, is that of managing the desperately demotivated and near function-free executives. Getting them to look busy at their desks is increasingly difficult - especially since we had to take the internet porn sites off the permitted lists - and it just looks terrible to visiting investors if they gather in groups with bottles. Nobody ran a course at Harvard Business School on managing indolence and it's bloody difficult.

And that's why managing this lot is barely bearable...