Private equity is structured around a small group of selective investors and managers whose efforts are magnified by the heavy use of leverage in the businesses that the funds control. This is an inherently pricey set-up.
Investors need higher returns to offset illiquidity; interest costs are high to offset the risk that comes with leverage; managers who have demonstrated the skills needed to design these arrangements and to maintain strong relationships with providers of capital demand high fees.
During the industry’s growth some of these costs were ameliorated by a long-term decline in interest rates, which enabled deals to be periodically refinanced at lower rates. Today rates can hardly go any lower, and should eventually rise. This is one of the reasons Mr Schulte and others see little growth to come.
Top 4 Private Equity Firms:
Blackstone
KKR
Apollo
Carlyle
The market capitalisation of the big four is about $50 billion, which would barely break the top 100 of the Fortune 500; between them they employ only about 6,000 people. But the value and economic importance of the businesses held by their funds (which are owned by the limited partners, rather than being company assets) are far greater. The 275 companies in Carlyle’s portfolios employ 725,000 people; KKR’s 115 companies employ 720,000. That makes both of them bigger employers than any listed American company other than Walmart. The big four have by far the largest portfolios, but others such as TPG, General Atlantic and Mr Geithner’s Warburg Pincus have a long list of familiar businesses that they either used to own or still do. According to Bain, a management consultancy, in 2013 private-equity-backed companies accounted for 23% of America’s midsized companies and 11% of its large companies.
Growth of Private Equity Firms
1980 – 24 private-equity firms
2015 – 6,628 private-equity firms (620 were founded in 2015)
Private equity’s vitality has seen it replace investment banking as the most sought-after job in finance.
Some investment banks now pitch themselves to prospective hires as gateways to an eventual private-equity job.
To continue: LinkedIn