The "Investments" made by private equity firms are not the same as investments made by you and I. Why? Because unlike for a public company, holding a managing

The "Investments" made by private equity firms are not the same as investments made by you and I. Why? Because unlike for a public company, holding a managing stake in a private company in certain circumstances and controlling how they compensate you for your services, permits you to legally pay yourself (or perform financing indistinguishable from paying yourself) in shares that you assign an arbitrary value to. Let's say I've taken over management of a private retail firm with a big multibillion-dollar balance sheet that's barely breaking even. Yesterday when my finance firm borrowed $800M to acquire it, I felt like the company was worth $900M, today as I guide it through the bankruptcy process I feel like it's worth $100k, which has no consequences whatsoever except for the $5000 in shares (5% stake) I'm issuing to myself today as a management fee. Tomorrow I'll feel like it's worth $1400M once some of its debts have been renegotiated and I take it public again. My shares just appreciated 1,400,000%. https://www.theatlantic.com/politics/archive/2012/09/whats-really-going-on-with-mitt-romneys-102-million-ira/261500/ https://www.theatlantic.com/politics/archive/2012/09/whats-r... This is a tiny, oversimplified picture of how all this works; Everyone that takes advantage of these structures has their own spin on it. In VC it may take the form of simultaneous dollar-capitalized debt and ownership stakes. It would take an aggressive forensic audit to even know what's been employed here. There are more than enough levers to pull for this sort of compensation scheme to use arbitrary valuations to make a mockery of the program, though. With enough financial lawyers and enough money, they control the vertical and the horizontal here. That money is tax-free. In this hypothetical, I've ascended to a partnership at this firm at age 59. I get full control of that money at age 65.