Private Equity industry's assets under management grows to $2,500 billion

Private equity firms have enjoyed strong growth in assets under management, hitting a record $2.5 trillion, while investors have enjoyed strong returns on their investment. The industry is seeing increasingly larger numbers of active PE firms, while investors are becoming increasingly active themselves in the investment process. The changing dynamic within the industry creates opportunities and challenges for investors and PE firms alike.

The global private equity (PE) industry has enjoyed a good run over the past decade. While the financial crisis put a dent in exits, the recent recovery, and the sale of pre-crisis stock lead to a boom in deals. Interest in the industry from a range of global, often large capital stakeholders, such as sovereign wealth funds and pensions funds, looking to generate strong yields – the industry has in recent years outperformed other major asset classes.

The sustainability of the boom is, however, by no means certain. To explore the industry, as well as key factors that may come to affect it in the longer-term, The Boston Consulting Group (BCG) explored the industry’s fundamentals in its ‘Capitalising on the new Golden Age in Private Equity’.

The boom of the industry has given rise to increased interest from players seeking to make bank from the success of the industry. The number of PE firms has increased steadily since the early days of the industry in the 2000s. Last year there were around 4,700 PE firms operative globally, with around 7% (319) of those firms new to the game. The increase in the number of firms active in the arena continues to rise year on year, although the addition of new firms has yet to reach the levels seen in 2008.

The industry as a whole has seen assets under management increase by around $1 trillion since just prior to the financial crisis, when assets stood at $1.4 trillion. Aside from the seemingly ever increasing number of assets under management, the industry is also flush with dry powder, totalling around $900 billion.

The high level of dry powder, resultant from the increased interest of large capital holders, and low interest rates, means that some of the larger funds are oversubscribed, creating opportunities for smaller players, and funds, to get in on the action.

Competition within the industry has increased as more and more limited partners (LPs) seek to become directly involved in the industry, coming to work more closely with GPs, having their own internal teams trained in the art of good PE stewardship or seeking co-investment opportunities. The latter particularly has been found by LPs to improve their returns on investment, by, among others, reducing the fees paid by the LP.

The current environment benefits particularly LPs with large capital, which are able to access the top performing funds, as well as reduce their fee burden, while smaller LPs have difficulty negotiating fees, while smaller funds find themselves needing to compete for investor interest by, among others, lowing fees.

The research notes that large funds have additional benefits for LPs, due to their relatively broad spread of PE asset classes, offering a broader risk profile for the investors and their fickle stakeholders. The top five funds, for instance, are relatively diversified – The Blackstone Group is almost evenly distributed across PE, real assets, credit and hedge funds, while TPG capital and Apollo Global Management are the least diversified of the large funds, at 71% PE and 72% credit weighted respectively.

In addition to the top five largest PE funds’ large asset clout, they are also some of the world’s largest employers. In the US for instance, the firms employ more than 960,000 people across their portfolio companies, considerably more than the US Postal Service, Kroger and McDonald’s, although well behind Walmart on 2.3 million. In Europe, however, the top five are the combined largest employer across their companies, well ahead of Volkswagen and Compass Group. In the Asia-Pacific region the top five firms take fifth spot, behind Stage Grid but ahead of Sinopec Group.

The large and global presence of the industry has resulted in increased regulatory focus, as governments take more of an interest. The industry is also finding itself at the forefront of wider transformations in terms of sustainability, in part driven by LP demands and in part due to improved returns on investment. According to the consulting firm, the industry finds itself on the forefront of wider moves to improve the social and environmental business imperatives, over merely maximising profit at the expense of social and environmental consequences.

“The current conditions are favorable in so many ways, but there are also challenges looming ahead,” says Tawfik Hammoud, a Senior Partner at BCG and the lead author of the article. “We think top managers will use this as an opportunity – or even an imperative – to sharpen their thinking, improve their discipline, and be bold in several dimensions of their businesses.”