7 Ways to Put Money in Your Pocket From Private Equity Investments

I have seen it so many times - people making good investments but getting poorer. Instead of getting richer, their investments make them spend more money. So, in the end, it was a loss and not a profit.

You have to understand that if it doesn't bring money into your pocket, it is not an asset. If your investment is not an asset, then you are doing something wrong. Sometimes, you just have to sell it and move on.

Your investments should make you money. It shouldn't make you spend more money. There are people buying themselves jobs and expenses and calling it investments. This is especially common in the private equity world.

Private equity investments are private businesses where you buy (or own) an equity stake. This means that you own a certain percentage of a company that is not registered on any public stock exchange.

For example, there is a department store in your city and you own 50% of the share capital. That is private equity. It is not limited to any industry. As long as it is a functioning business, you can call it private equity.

Private equity is not a job. You can work at a private business where you own equity. But if the business cannot function without you, then it is not an investment. It is just another job.

If you have to constantly support the business with your own money and you never take money out, then it is not an investment either. You must learn to take money out.

Now, there are different kinds of investment models for private equity. That is just a fancy way of saying that the expectation of returns of each business is different. Some investors expect to make money immediately and often. Some are expecting one huge payday (triggered by an acquisition or IPO). Some are satisfied with regular cashflow. While others find Innovative ways of making money from the business.

But the point remains - if you are not making money (or not on track to make serious money), it is not an investment. In fact, I am of the opinion that if it will make you serious money in the future, it should start making you classic money now.

In other words, if it is not making you money now, there is a high probability that it will not make you money in the future.

So, if you have a private equity investment today or plan to have one soon, here are 7 ways to make it put money in your own pocket:

1. Profit Share

The purpose of business is to make a profit. Profit is the positive difference between the money that came in and what you spent. This means when revenue is greater than expenses (which includes taxes), you make a profit.

The other side of this is expenses getting greater than the revenue. This would mean a loss. While losses can be bearable for a while, it is not a good sign for the sustainability of the company. The bigger the business gets, the more unbearable the losses are.

When you make profits, there is a temptation to want to put more into the business so that more profits can be the outcome. However, things are not always that simple. Some businesses will turn in record profits at $2 million invested. But if you invest $20 million, you only get losses.

You have to know the capacity of the business and understand that more capital doesn't necessarily mean more profits. You don't use capital to create opportunities. You use capital to pursue already-created opportunities.

Therefore, when you make profits, take money off the table. Don't be eager to plough back profits into the business, unless there is a clear plan. Take your share of the profits and spend it how you like.

2. Deal Cashflow

This is when you do a deal within the business. This could be an acquisition of another business to be absorbed into the business. It could be an asset purchase. It could be any kind of deal, but it is often a huge deal involving a significant amount of cash.

Generally, when such deals are concluded, it is a good practice to reward everyone who played a role in making it happen. This mostly applies to company board members. And it is recorded as one of the expenses of the company (for the deal).

When big deals become successful, reward people. And most importantly, reward yourself. Take money off the table. Put money in your pocket. It is okay to.

3. Management Salary

Just because you are a director or owner doesn't mean you can't take a salary. If you are managing the business one way or the other, you should take a salary.

Salaries are mostly small monthly compensations. And if the business isn't turning a profit yet but you have a couple of investors who believe in it, then you should take a management salary.

If all the business does is take money, energy, and time away from you, you are not going to be in the right vibration to manage it well. If it takes energy and time from you, it should yield some money.

4. Performance Bonus

Can you pay yourself a performance bonus? Yes! As long as other employees are also given a performance bonus. If you are in active management of the business, it is not out of place to issue performance bonuses at the end of the year.

If you are in management and you approve performance bonuses to everyone aside from yourself, you are not being fair to yourself. Just because you don't need the money doesn't mean you shouldn't take it.

You take the money, not because the money will change your life, but so that you can feel that what you are working on is yielding some results.

5. Incentive Bonus

These are bonuses connected to the performance of certain tasks or getting certain results. Think of this as a bounty. Aside from regular job activity everyone has to do, you should have these task bounties.

Anyone who takes up a task bounty and delivers on it gets the amount of money assigned to the task. These are often complicated tasks. It is often a results-oriented task.

One of the ways I have seen this play out in some companies is that they say if you recommend a qualified person to the company and the company ends up hiring that qualified person, you get paid $5,000.

For very senior positions, I have seen a bounty of $50,000 on such a task. That could be another way to take money off the table. But it must be fair and square to all employees in the business.

6. Leveraged Influence

This is common, but most don't realize it. Even people who do it often don't realize what they are doing. This is when you use your position in a business to get an outside gig.

It could be speaking engagements. Some get book deals. Some even get one-off jobs, especially trainings. Most senior people don't pay attention to this enough. Their eyes are mostly on their business. But it's a big world out there.

Leverage your influence. Many are willing to pay to learn what you do effortlessly on a daily basis. If you have a skill that is in high demand, you can make a lot of money training people on it (on the side). And that won't be possible if you don't have the business (opportunity) to perfect the skills.

If your business isn't as profitable as you wish it to be yet and you have an in-demand skill, think about leveraging your influence to put more money in your pocket.

7. Debt Refinancing

In this case, you have borrowed from the bank. But financial conditions have gotten better and your business is thriving. You can go to the bank to refinance that debt.

In other words, you tell the bank to borrow you more money and add the leftover of the previous debt to the new debt, which will now be paid at a (hopefully) lower interest rate.

Let me explain better. Let's say you have 2 million debt with the bank at a 4% interest rate. And your business has grown (that is, now making more money), you can tell the bank to borrow you 5 million. Here is how it works.

Hopefully,  let's assume the interest rate of the bank is now 3%. And you have 1 million left to pay on your previous debt. When you borrow the (new) 5 million, the 1 million left will be added to the new debt. Which makes 6 million in debt. And all 6 million will now be subject to a 3% interest rate.

This is how the debt refinancing game is played (in a simplified form). Remember, you get a new 5 million from the bank. And you can take money off the table with that, as long as the business is doing well enough.

Conclusion

Remember to put money in your pocket. Investing is supposed to make you richer, not poorer. Private equity investments are my favourite type of investment and they can be very lucrative. But you must be aware of ways to take money out:

1. Profit share

2. Deal cashflow

3. Management salary

4. Performance bonus

5. Incentive bonus

6. Leveraged influence

7. Debt refinancing

Share this with an entrepreneurial friend.

P.S. Take a look at my investing outlook for 2024