It can sound like an understatement to simply call the private equity channel “hot.” By estimate of The Economist, private equity managers handle $10 trillion in assets, a sum that has quadrupled in less than 15 years.
Private equity funds raised an all-time record $940 billion in 2021, reported Wall Street law firm Wachtell, Lipton, Rosen & Katz. With that cash infusion, and returns from earlier investments, private equity titans are seated atop a pile of $2.3 trillion in cash as they enter 2022.
Some observers argue it is too much money. “Private equity funds are raising money faster than they can spend it,” proclaimed Bloomberg.
Others take exception to that stance.
“It’s important to recognize that when private equity firms do well, companies become better capitalized, more efficient and have the potential to become more profitable,” says Brian Buehler, managing partner of Triton Pacific Capital Partners, a PE firm. “Successful results can benefit investors — such as family offices, RIAs, broker/dealers and accredited investors — with rightsized outcomes that contribute to the economic wealth of society as a whole.”
Why the flood of capital into private equity? In part it is because of the global glut of capital — called the “global savings glut” by the Chicago Fed in a 2021 study, and by many others before that — resulting in depressed returns and richly priced assets the world over. The daily cliche of property mavens, that there is “too much money chasing too few deals,” is largely true, say macroeconomists.
So, with public assets fully priced and yields suppressed, individual and institutional investors alike are open to the siren calls of private equity funds, and their promises to beat the market through leverage, or intensive management, or backing the right companies.
During the first quarter of this year, U.S. private equity funds invested about $222 billion over 1,418 deals, as calculated by the American Investment Council, with the information technology sector receiving the largest portion, $66 billion with an average investment deal of $748 million.
Other leading beneficiaries of PE funds’ largesse were the business products and services sector, with $55 billion in investments and an average deal size of $252 million, and healthcare with $41 billion invested during the quarter and an average deal size of $379 million.
PE firms have been entrusted with a great deal of investors assets, now the world watches as the best minds in private equity go about the business of making it pay.
To see the tables and charts that appeared with this article, go to the September 2022 print issue or click here and click on the September 2022 ebook edition on that page, then turn to pages 42-43.