Private equity has been making headlines recently due to its growing influence on the global economy. This investment sector has come a long way since its inception in the 1940s and has now become a vital source of capital for businesses across various industries.
Private equity (PE) is an investment asset class that involves the purchase of equity in private companies or taking them private. To invest in private companies, PE firms raise funds from investors, such as pension funds, endowments, and high-net-worth individuals. The objective is to acquire or invest in promising companies with growth potential, improve their operations, and exit them through a sale or an initial public offering (IPO).
According to the 2021 Global Private Equity Report by Bain & Company, the private equity industry's global assets under management (AUM) reached $4.5 trillion in 2020, up from $2.5 trillion in 2010. North America remains the largest market, accounting for 54% of total global AUM, followed by Europe at 26% and Asia-Pacific at 18%. The report also found that PE firms generated an average return of 18.7% over the past decade, outperforming public equities, bonds, and other asset classes.
Private equity has become a significant player in the global economy, with a broad impact on businesses, workers, and investors. Here are some key takeaways on the private equity sector:
PE firms invest in companies with significant growth potential, particularly those in the technology, healthcare, and consumer sectors. These investments can help companies accelerate their growth and expand their operations, creating jobs and driving innovation. According to the Private Equity Growth Capital Council, PE-backed companies in the United States alone employed over 8 million people in 2019 and contributed $1.3 trillion to the US economy.
Private equity firms focus on operational improvements, cost-cutting, and other strategies that can help businesses increase efficiency and profitability. This approach to capital allocation can unlock value and create a more efficient use of resources, benefiting not only investors but also employees, customers, and suppliers.
PE firms have a long-term perspective on their investments, typically holding them for three to seven years. This long-term horizon allows companies to make strategic investments and adopt growth-oriented strategies that may not be possible under a short-term focus. Private equity also tends to be less influenced by market volatility and short-term fluctuations, allowing them to focus on creating value for the long term.
Despite its impressive growth and contributions to the economy, the private equity sector is not without criticism. Detractors argue that PE firms prioritise returns for investors over the interests of employees, customers, and other stakeholders. There have been cases of PE-backed companies cutting jobs and benefits or engaging in questionable business practices to increase profitability.
Additionally, there are concerns over the lack of transparency and oversight in the private equity sector. PE firms are not subject to the same regulatory requirements as public companies, making it difficult to monitor their activities and ensure accountability.
Private equity has become a powerful force in the global economy, with a growing impact on businesses, investors, and workers. While it has its critics, private equity firms have contributed to the growth and innovation of many companies, driving economic growth and job creation. As the sector continues to grow, it is important to strike a balance between maximising returns for investors and creating value for all stakeholders involved.