Private equity has lost its edge. In good times and bad, sponsors can generate lucrative income simply from assets they've amassed through fundraising -- the larger, more numerous the funds they raise, the fatter the fees. Why get creative, aggressive, entrepreneurial?

Private equity, says JLL Partners Inc. managing director Paul Levy, who founded the New York private equity shop in 1988, is today dominated by assets under management, a transformation that's been unfolding for several decades.

Firms have come to see themselves by asset size rather than as entrepreneurs, he argues. Not that there's not plenty of incentive driving that shift. By expanding their investment pools, general partners engorge themselves on management fees that are harvested regardless of performance or the economy.

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A firm with a $2 billion fund that charges a 2% management fee would collect $40 million a year just to run the business, Levy says. If that firm then went out and raised a $10 billion or $15 billion fund, its income would shoot up to as much as $300 million. "People are succeeding before they start investing," says Levy.

Even amid a downturn as severe as today's, sponsors continue to rake in a healthy income by taking a cut on investor capital commitments and requiring the companies they've acquired to pay them for the time they spend monitoring those businesses. Levy did not single out any particular buyout firm, but consider one as large as Blackstone Group LP to get a sense of just how lucrative this fee model can be. Last year, Blackstone, whose businesses include private equity, real estate, hedge funds and collateralized loan obligation vehicles, pocketed just under $1.5 billion in management and advisory fees.

And it continues to amass capital. As of June 30, Blackstone's fee-paying assets under management totaled $93.5 billion, up this year by 3%, or $2.5 billion. The firm says about half its assets -- largely those from its private equity and real estate funds -- earn cash revenue based on committed capital, "not unrealized marks." That income, in other words, is shielded from trouble in its portfolio.

Blackstone's private equity practice alone realized a base management fee rise of 5.5%, to $269 million, last year, from $255 million in 2007. The increase was primarily driven by the full-year impact of the $4.68 billion of additional capital it raised in 2007 for its fifth private equity fund, the $21.7 billion Blackstone Capital Partners V.

Limited partners are wise to sponsors' ways, of course, but are willing to overlook the rich fees for the chance to reap big returns. "The LPs threw in the towel a long time ago," Levy says.

JLL is in the market for a new fund, so far accumulating about $1 billion worth of commitments. Its last fund, JLL Partners Fund V LP, closed at $1.5 billion in late 2005. To date, the firm has roughly $4 billion of capital under management.

But who's counting?

"It's the way many people -- not all -- many people think about [private equity]," says Levy.

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