Top private equity firms are “the new kings of Wall Street”, says The Economist. Private equity refers to investments that are not listed on public markets. It usually makes the headlines when private equity firms buy a listed company and take it private – such as supermarket Morrisons’ £7bn sale to Clayton, Dubilier & Rice last October.
The sector has tripled in size over the last decade and now manages roughly $10trn of assets (about 10% of total assets globally). But firms that once focused on leveraged buyouts, such as Morrisons, “now look just as keenly for opportunities in private debt, real assets such as property and infrastructure”. In 2010 buyouts accounted for 80% of business at KKR, one of the leading private equity groups, but today that figure is less than half.
Not everybody is impressed. “In some parts the private equity market may be like a Ponzi scheme,” says Vincent Mortier of Amundi, Europe’s biggest asset manager. “The vast majority of deals currently are being done between private equity firms. One private equity firm will sell to another, which is happy to pay a high price as they have attracted a lot of investors… Eventually there will be casualties, but that might not be for three, four or five years.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Mortier is correct that private equity firms have been paying steep prices for acquisitions, says Shuli Ren on Bloomberg. But in that they are no different from public market investors. And while two-thirds of sales by private equity firms were to other private equity firms in the first quarter, the value of such deals – $43bn so far this year – “is by no means extraordinary by historical standards”. Maybe traditional asset managers such as Amundi are envious of the higher returns generated by private equity over the past decade
Increasing interest
The world’s wealthy have noticed. A UBS survey of 221 family offices that oversee $493bn in assets finds that they increased direct and indirect portfolio allocations to private equity to 21% last year, compared with 17% a year before. The increase comes at the expense of fixed income investments, such as bonds (down from 13% to 11%), while 24% of assets were held in public equity investments and 12% in real estate.
Big institutional investors, such as pension funds and sovereign wealth funds, have also moved in, says Miriam Gottfried in The Wall Street Journal, investing nearly $1.3trn in private markets last year.
Pension funds have an average of 26% of their portfolios in private assets. The need for diversification means there isn’t much room for those allocations to move higher, so private equity giants have started to target “everyday millionaires”, where the pool of untapped capital is potentially vast. An estimated $79.6trn in investible assets was held globally by individuals worth $1m or more last year, of which less than 5% is thought to be currently invested with private equity firms.
SEE ALSO:
The benefits of private equity are about to get tested
-
M&S and Tesco among those warning of a £7bn Budget hitSeventy-nine UK retailers have written to Chancellor Rachel Reeves about possible price rises and job cuts - here is what it means
-
How much does it cost to move home under the Labour government?Home-moving costs are rising and could get more expensive once stamp duty thresholds drop in April 2025
-
Why the market is wrong about private equityAnalysis When it comes to listed private-equity trusts, investors are overly sceptical, with many funds trading at heavy discounts to their net asset values. But the market has it wrong, says Max King.
-
The benefits of private equity are about to get testedAnalysis Private equity has grown ever more popular in recent years. But its touted benefits are set to be tested, says John Stepek.
-
This specialist software fund is still cheapTips HgCapital Trust’s portfolio looks expensive, but its strong record should reassure investors, says Max King.
-
Private equity eyes up high-street banksOpinion Carlyle’s bid for Metro may be just an appetiser before the hearty main course, says Matthew Lynn
-
A listed private equity fund going cheapTips Some of the fastest-growing businesses are unlisted. This private equity fund can help you profit from them, says David Stevenson.
-
How to stop the private-equity takeover of Britain’s listed companiesOpinion Putting up barriers in the open market would make no sense. But there is another way, says Matthew Lynn. Just start valuing British equities properly.
-
Invest in a promising new chapter at RIT Capital PartnersTips The long-standing chairman of the RIT Capital Partners investment trust stepped down in 2019, but the new team are doing very well, says Max King.
-
Two private equity trusts: one to buy, one to avoidOpinion The tech boom has fostered a lot of great businesses, but with many backed by private equity, few retail investors have been able to profit. Here, Max King looks at two investment trusts that provide a way in.
