A private equity firm is first a fee business on the capital you commit, and only second a performance business on the profits it makes. The accounts of the listed giants show which one really pays the bills.
Key takeaways
- A private equity firm (the general partner) is separate from the fund it runs. Outside investors (limited partners) supply almost all the capital; the firm supplies the people, the deals, and a small co-investment.
- The firm’s day job runs in four phases: sourcing deals, underwriting them, taking control, and creating value before an exit.
- The firm earns two ways: an annual management fee of around 2 percent on committed capital, paid regardless of performance, plus carried interest of around 20 percent of profit above an 8 percent hurdle.
- Blackstone’s 2024 accounts make it plain: about $7.1 billion in fees versus $2.3 billion in realised carry. Judge a manager on returns after all fees, and on which engine the firm is really built for.
Ask what a private equity firm is and most answers stop at “it buys companies, fixes them, and sells them for more.” True enough, but it skips the part that decides whether you should ever hand one your money: how the firm itself gets paid. That is a different question from how its investors get paid, and the gap between the two is where a lot of the returns quietly go.
The focus here is the firm: what the people there do between buying and selling, and where every pound of the firm’s own revenue comes from. The headline you should carry away is that a private equity firm makes most of its money from fees on the capital you commit, whether the deals work or not. The performance cut is real and can be enormous, but it sits on top of a fee income that arrives regardless. Read the fees and the profit share correctly and you can read the manager.
Private equity is not a niche any more. Global private markets ran to roughly $13 trillion of assets under management by mid-2024, and buyout funds are one of the largest engines inside that number (McKinsey Global Private Markets Report 2025). At that scale the fee terms are the product, not a footnote.
The firm and the fund are not the same thing
Two words get used interchangeably and shouldn’t. The firm is the general partner (GP): the people, the brand, the deal team, the operating partners, the relationships. Think Blackstone, KKR, Apollo, Carlyle. The fund is a separate pool of money, a limited partnership, that the firm raises from outside investors and then manages. Those outside investors are the limited partners (LPs): pension schemes, insurers, sovereign wealth funds, endowments, and a growing slice of wealthy individuals.
The LPs put up almost all the cash, usually 97 to 99 percent of it. The firm commits a slug of its own money too, typically 1 to 5 percent, so it has skin in the game. Then it goes to work: sourcing deals, buying companies inside the fund, improving them, and selling them, taking a fee for running the fund and a share of the profit if the fund does well. A large firm runs many funds at once, each a distinct vintage with its own investors and its own clock. The firm is the constant; the funds come and go.
Get that split straight and the money question answers itself. The firm earns from the fund, through two revenue lines that behave completely differently.
What the firm actually does between buying and selling
Private equity likes to talk about “proprietary deal flow,” but the day job is a repeatable four-phase process, and the firm is accountable for all of it.
Sourcing. Finding companies to buy. Most deals come through investment banks running an auction, through the firm’s own network of executives and advisers, or through direct approaches to owners who are not formally for sale. Winning is rarely about paying the most. It is about certainty, speed, credible financing, and a plan the seller trusts, which matters most in messy situations like corporate carve-outs or founder successions.
Underwriting. Deciding what a company is worth and what has to go right. This is where the firm’s judgement earns its keep. Buyouts usually add debt, often a multiple of the target’s earnings before interest, tax, depreciation and amortisation (EBITDA), which is why the strategy is called a leveraged buyout. The median EBITDA multiple buyout firms paid hit a record 11.8 times in 2025 (McKinsey, 2025), so overpaying is the fastest way to lose. Good firms use the model as a constraint, not a sales document.
Ownership. After the deal closes, the firm takes control or strong governance rights: board seats, vetoes on big decisions, the power to change management and reset incentives. Management teams often roll their own equity into the deal so their payout tracks the firm’s. Its edge is the ability to make better decisions faster than the business could under its old owners.
Value creation. The work that justifies the price. Cost cuts are the cliché, but the durable gains come from professionalising a business: sharper pricing, better data and systems, tighter procurement, stronger management, sometimes a full repositioning that changes what the company sells. Firms bring in operating partners and set a specific plan for the first hundred days. When it works, the company is worth more because it is genuinely better run, not because the market moved.
Then the firm exits, selling to a strategic buyer, to another private equity firm, or floating the company on the public market. Sale complete, the fund returns capital to its investors and the firm collects its cut.
How the firm makes money: the two revenue lines
Every private equity firm earns from two sources, and they are wired differently on purpose.
1. The management fee: the machine
The management fee is an annual charge for running the fund, paid whether the fund makes money or loses it. The industry benchmark is around 2 percent a year. During the investment period it is charged on committed capital, the total the LPs have promised, not the smaller amount actually deployed yet. After the investment period it typically steps down and is charged on invested capital or net asset value instead (Carta, “Management Fees”).
This is the point most explainers skate over. On a fund still in its investment period, you pay the fee on money the firm is holding but has not yet put to work. It is not a share of your profit. It is rent on your commitment, and it is the most predictable money the firm earns, arriving every year regardless of performance.
2. Carried interest: the upside
Carried interest, or “carry,” is the firm’s share of the fund’s profit, standardly 20 percent, but only after investors get their money back plus a minimum return. That minimum is the hurdle rate or preferred return, conventionally about 8 percent a year (ScaleX Invest). Clear the hurdle and the firm takes its 20 percent; miss it and the firm earns no carry at all on that fund. The 2 percent fee and 20 percent profit share together are the famous “2 and 20.”
Carry is where the life-changing money is, and where the firm’s interests line up best with yours, because it only pays if the deals work. It is also lumpy and years away, arriving only as companies are sold, whereas the fee arrives every year.
A quieter third line is worth naming: deal and monitoring fees, charged to the acquired companies themselves for arranging the transaction and sitting on the board. These used to pad the firm’s take at the LPs’ expense; investor pressure has largely forced them to be rebated back to the fund, but they have not vanished and are worth asking about.
A worked example: where the money actually lands
Numbers make this concrete. Take a £1 billion buyout fund, standard 2-and-20 terms, an 8 percent hurdle, a ten-year life. Illustrative figures to show the mechanics, not a forecast.
The fee line, every year, no matter what. Two percent of £1 billion committed is £20 million a year during the roughly five-year investment period. That is £100 million of management fees banked before a single company is sold. Say the fee then steps down to 1.5 percent on invested capital for the back half of the fund’s life and averages around £12 million a year. Across ten years the firm collects roughly £210 million in management fees, and it keeps that whether the fund triples the money or loses a fifth of it.
The carry line, only if the fund performs. Now say the firm is good and the £1 billion becomes £2.5 billion by the time everything is sold, gross of carry. Investors first get their £1 billion back. They then get the 8 percent preferred return. After a typical GP catch-up, the firm takes 20 percent of the profit above the return of capital (Hamilton Lane, “Evaluating Private Equity Fees”). Twenty percent of a £1.5 billion profit is roughly £300 million of carried interest, on top of the £210 million in fees.
In the good case, carry is the bigger prize, as it should be, because it rewards actually making investors money. Now run the bad case. If that fund limps to £1.1 billion, barely clearing the hurdle, the carry is close to nothing while the firm still keeps its £210 million in fees. Whatever happens to the deals, the fee is money the firm has already banked. That is why the sharpest question to ask a manager is not “what’s your best fund” but “how much of your firm’s income comes from fees versus carry,” because it tells you whether they are paid to gather assets or to perform.
What the listed firms’ accounts show
The publicly traded firms have to report the split, and the numbers make the pattern hard to miss.
Blackstone, the largest, ran $1.13 trillion of assets under management at the end of 2024, of which $830.7 billion was fee-earning. Its total management and advisory fees for 2024 were about $7.1 billion, up from $6.7 billion the year before, while its realised performance revenues, the carry it actually banked, were $2.3 billion (Blackstone Q4 and Full-Year 2024 results). So even at the largest firm in the industry, in a strong year, recurring fees brought in roughly three times the realised carry. Fee-related earnings, the profit from the fee side alone, hit a record $5.3 billion.
The others echo it. Apollo reported full-year 2024 management fees of about $2.6 billion, leaning heavily on stable, fee-like credit income. KKR‘s management fees grew to roughly $3.2 billion, with fee-related earnings carrying a margin above 60 percent (KKR Q2 2024 results). The accrued carry not yet paid out is real and large, Blackstone alone carried $6.3 billion of it waiting on its balance sheet at year-end 2024. But the money that shows up every quarter and funds the payroll is the fee.
A private equity firm is, first, a fee business built on committed capital, and second, a performance business built on carry. The best of them earn their carry many times over. The question for anyone considering one is which of those two engines the firm is really run for.
What it means for you as an investor
You do not need to allocate to private equity to use this. You need to read managers correctly.
Fees compound against you the way returns compound for you. A 2 percent annual fee on committed capital, paid for years before the money is even deployed, is a real drag already baked into the “net” return, which is why the number to judge a manager on is return after all fees and carry, never gross. Ask what the fee is charged on and when it steps down. Ask whether deal and monitoring fees are rebated to the fund. Ask where the hurdle sits and whether carry is taken deal-by-deal or only after the whole fund has returned capital, because deal-by-deal carry pays the firm sooner and can claw back later.
A firm built to maximise fee-earning assets behaves like an asset gatherer. A firm built around realised carry tends to be more selective, with tighter portfolios and sharper attention to exits. Neither is wrong, but they are different businesses, and the fee-versus-carry mix in the accounts tells you which one you face. For the wider picture of how buyouts sit alongside other private strategies, see our private equity guide, and for the lenders who finance these deals, our work on private credit covers the other half of the capital stack.
One current point for anyone earning carry rather than paying it: from 6 April 2026 the UK taxes carried interest as trading income rather than as a capital gain, at an effective rate near 34.1 percent for “qualifying” carry where the fund’s average holding period is 40 months or more, and up to 47 percent where it is not (Mayer Brown, Feb 2026). The economics above are unchanged; only how the firm’s partners are taxed on the upside has moved.
FAQs
Is the management fee charged even if the fund loses money?
Yes. The management fee, about 2 percent a year, is charged for running the fund and is paid regardless of performance. Carried interest is the part that depends on the fund making money above its hurdle.
What is carried interest in plain terms?
It is the firm’s share of the fund’s profit, usually 20 percent, paid only after investors have their capital back plus a minimum “hurdle” return of roughly 8 percent a year. Below that hurdle, the firm earns no carry.
What does “2 and 20” mean?
A 2 percent annual management fee plus 20 percent of profits above the hurdle. It is the standard, though large investors often negotiate lower terms.
Do private equity firms make more from fees or from carry?
It varies by firm and year, but the recurring management fee is the steadier and often larger source. At Blackstone in 2024, fees were roughly three times the realised carry. Carry can be the bigger prize in a strong fund, but it is lumpy and arrives years later.
Is any of this financial advice?
No. This is general information about how private equity firms are structured and paid, not a recommendation to invest in any fund or firm.