Two and Twenty

About the Author

Sachin Khajuria is an industry insider with over twenty-five years of experience in the financial sector. He has worked as an investment banker and later as an investor at one of the major private equity firms, where he rose to the partner level. Khajuria is deeply invested in the private equity industry and offers a unique perspective as both a participant and a critic. He aims to provide an honest, unfiltered view of the workings of private equity, eschewing corporate jargon and spin for a straightforward approach.

Main Idea

In "Two and Twenty: How the Masters of Private Equity Always Win," Sachin Khajuria aims to demystify the world of private equity. He explores how this often misunderstood industry operates, emphasizing its potential to create massive wealth and save struggling companies. Khajuria argues that private equity is essential for economic growth and financial stability, particularly for pension funds and college endowments. He provides an insider's view of the strategies, structures, and characteristics that make private equity firms successful.

Table of Contents

1. Introduction
2. How It Works
3. The Structure of Private Equity
4. Traits of Those Successful in Private Equity
5. What Sets Private Equity Apart
6. The Library
7. Conclusion

Introduction

Sachin Khajuria begins by setting the stage in 2008, a time of economic turmoil. He introduces "the Firm," a private equity company poised to capitalize on the financial chaos. Khajuria's goal is to explain the mechanisms and mindset that allow private equity firms to thrive in such environments. He writes, "I am hugely supportive of this industry and invest actively in it across the major firms - from my own account. I am your insider, but I am also independent. I’m not interested in spin or corporate talk. I call it like it is."

How It Works

Khajuria delves into the mechanics of private equity, emphasizing that firms do not merely invest money. Instead, they infuse massive amounts of capital and expertise to improve the entities they acquire. He describes the process as "buy the target, control it, improve it, and sell it for a profit." This symbiotic relationship ensures that when the company prospers, so does the Firm.

He highlights the essential role of private equity in supporting pension funds and endowments, which rely on the high returns generated by these investments. Khajuria asserts, "And so teachers, firefighters, healthcare workers, and other employees who are part of retirement systems depend on private equity to make the math of their pensions work. They need places like the Firm."

The endgame for private equity firms is to sell their stakes in companies for a profit. This can involve selling to a large corporation, another private equity fund, or through a public offering. The success of these exits relies on the Firm's deep understanding of both financial and operational aspects of the businesses they invest in.

The Structure of Private Equity

Khajuria outlines the pyramid structure of private equity firms, which consists of three levels:

• The Analytic Base: Members typically spend about five years here, learning the business models and finances of potential investments.
• The Middle Layer: Known as the deal quarterbacks, they manage quality control and ensure thorough understanding of investments.
• The Senior Set: Partners or managing directors who lead the firm's investment activities and bear the greatest responsibility for success or failure.

Promotion within this structure is merit-based and highly competitive. Firms prefer to promote from within, though lateral hires are becoming more common. Teams working on deals are small, tight-knit, and intensely focused on protecting investments and increasing company value.

Traits of Those Successful in Private Equity

Khajuria identifies several key traits common to successful private equity professionals:

• Ownership Mentality: Team members take a personal stake in the companies they invest in, making tough decisions and working tirelessly to turn them around.
• Ruthless Analysis: Private equity professionals are brutally honest about the strengths and weaknesses of their investments. As Khajuria puts it, "We look squarely at the blemishes and scars on the investment and ask honestly, what, if anything, still looks good enough to salvage."
• Attraction to Complexity: They thrive in chaotic situations, seeking out complex problems that others avoid because they see the potential for high returns.
• Competitiveness: A strong will to win and a sense of desperation drive them to outperform their peers and explore new opportunities.

Khajuria emphasizes that these traits are crucial because private equity professionals only make money when their investments succeed. This creates a powerful incentive to excel and make sound decisions.