Private Equity

Private Equity

Industry Outlook

The private equity sector has bounced back after several years of poor performance caused by the economic recession. The number of private equity deals that closed in 2019 reached nearly 5,000, according to the American Investment Council, significantly higher than the 2,376 deals that closed in 2010 soon after the recession. Private equity funds are expected to grow by 58 percent (to $4.9 trillion) by 2023, according to Preqin, overtaking hedge funds as the largest alternative asset class.

The coronavirus pandemic, which began in late 2019 in Wuhan, China, disrupted most industries around the world in 2020 and caused an economic slowdown. Many private equity companies transitioned employees to remote work or reduced staff in the face of business lockdowns and social distancing requirements to prevent the spread of the virus. Private equity firms reportedly had record deals in 2020, despite the challenges of the pandemic. PricewaterhouseCoopers reported that "through mid-November [2020], investors announced nearly 4,100 deals, up 5 percent from all of 2019, clearing out a backlog of transactions." As of late 2020, the private equity, hedge funds, and investment vehicles industry consisted of 13,142 businesses and was valued at $212.9 billion. Annualized growth of about 3.4 percent was predicted for 2016 through 2021, according to the research group IBISWorld. Growth in this industry is expected to surge in 2021, at 7.1 percent, due to the accelerated distribution of the COVID-19 vaccine and the economic rebound. Improvements in stock market performance, increased demand from institutional investors, and an uptick in the private equity market are anticipated post pandemic.

Opportunities should be best at large, well-known investment houses because investors are shying away from perceived risky investments with smaller firms. According to Preqin, “the largest, brand-name managers are receiving the majority of investor commitments, with smaller managers—particularly first-time funds—finding it difficult to raise capital.” Hugh MacArthur, global head of Bain & Company’s Private Equity practice, says that “investor enthusiasm for private equity endures, leaving the industry awash with cash. This is both a blessing and a curse. Funds have ample money to spend, but the competition for deals is fierce. With deals being done at record-high multiples, the right sort of diligence is more essential now than ever before.”

The global research firm IBISWorld reports that the “private equity, hedge funds, and investment vehicles industry continues to become an increasingly integral part of institutional investor portfolios and a mainstream part of the asset management market,” and that it is increasingly becoming a global industry due to the “rapid growth in assets under management due to rising global wealth, lower international financial trading barriers, a broadening global investor base, and an increase in the number of larger alternative asset firms that operate on a global basis.”

Preqin estimates that private capital firms (private equity, private debt, real estate, infrastructure, and natural resources) worldwide employed approximately 163,000 people in 2016 (the latest year for which data is available). Demand continues for experienced and skilled private equity professionals. Job opportunities for financial analysts are expected to increase 5 percent from 2019 to 2029, according to the U.S. Department of Labor, or faster than the average for all careers. Employment for analysts who work with funds, trusts, and other financial vehicles will grow 6 percent during this same time span.

In 2017, Preqin surveyed more than 170 of the top firms in the private capital industry. Seventy-two percent of respondents cited the investments/deal team as the function that was in the greatest demand from a hiring/retention standpoint. Corporate operations (e.g., accounting, human resources, information technology, legal) ranked a distant second at 10 percent, followed by portfolio operations (9 percent), investor relations-capital raising (4 percent), executive management (3 percent), and investor relations-reporting/marketing/support (2 percent).

The private equity space is undergoing immense change. The storied firms that blazed the trail for private equity investing in the 1970s, 1980s, and 1990s are now up against stiff competition from investment banks, investment advisory firms (IAF), and hedge funds (such as Two Sigma Investments). Some non-PE entities are partnering with private equity firms to do deals. For example, the Vanguard Group, a large IAF, has partnered with HarborVest (which has been in the private equity industry for more than 30 years).

There will always be a need for private equity investing—and, thus, for private equity firms. Few other classes of investment can produce the kinds of returns that a well-run private equity fund can achieve. For institutional investors, private equity investing can unlock double-digit returns that can’t be attained with most other investments. Private equity investing also remains less tied to the vagaries of the stock market, and therefore it provides strong returns over time that only the best bull markets can match.

When it comes right down to it, a firm such as Blackstone, KKR, Carlyle, or Bain is just far better equipped—in money, experience, and ambition—to make private equity investing work. Hedge funds may dabble, and money-center banks and investment banks may open and close divisions based on ups and downs in the market, but most large private equity firms have remained steady through all kinds of economic conditions, gathering experience and knowledge that dilettante players simply don’t have.

And for the foreseeable future, there will always be companies open to a private buyout. If the demands on public companies were great during the bull market from 2003 to mid-2007, they are piling on even higher in today’s tense business environment. Quarterly revenue and earnings targets must be met, and stock buybacks and dividends are critical—stocks have been pummeled for even the slightest hint of weakness in earnings, and buybacks and dividends have become more prevalent as companies attempt to appease shareholders.

In addition, the requirements of the Sarbanes-Oxley Act—the regulatory law put in place after the Enron and Worldcom debacles—have proven to be onerous for many companies. Even if Sarbanes-Oxley’s requirements are relaxed in the future, private equity buyouts will always be a good opportunity for publicly traded companies to reinvent themselves outside of the glare of the public shareholders’ spotlight.

Many people will continue to be attracted to the industry as a result of its perceived prestige and the high salaries earned by PE professionals. Salaries for private equity firm managers rank among the highest in any industry. In 2019, the 25 highest-earning hedge fund managers made a combined $20.2 billion (or an average of $808 million each), according to Institutional Investor. Eight fund managers earned more than $1 billion in 2019. Private equity professionals received average earnings (base pay plus bonus) of $315,000 in 2017, according to the 2018 Private Equity and Venture Capital Compensation Report. Those without MBAs received $264,464. Earnings vary by the size of the firm, with those at large firms earning more than those at smaller firms. New hires start in the $100,000 to $120,000 range.