Private equity – the new kings of Wall Street

The private equity sector has tripled in size over the last decade and now manages roughly $10trn of assets.

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.”

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.

The benefits of private equity are about to get tested


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