Private equity is a flourishing industry that has scaled at a fantastic pace and grown ever more powerful largely outside of the public eye. The business revolves around the simple premise of achieving attractive returns by acquiring assets with a combination of debt and equity, and its continued success has facilitated the growth of this industry from 24 private equity firms in 1980 to roughly 8,000 firms managing billions of dollars around the globe. A report by EY says that private equity is “one of the most profound shifts in the capital markets since the 19th century.”
“Now, the way that companies are being funded is once again changing — and in the middle of that is private equity (PE) and other private capital providers.”
As the number of firms funded by private equity grows so does its influence; the Institutional Investor reports that companies backed by private equity employ nearly 9 million people in the United States alone. The industry’s increasing relevance is all the more astounding when you compare it to other financial institutions. The Economist reports “the number of banks peaked in 1984; of mutual funds in 2001; companies in 2008; and hedge funds, probably, in 2015.”
Today private equity firms are sitting on top of a mountain of dry powder, and it is anticipated that this growth will persist as it becomes increasingly available to a broader class of investor via 401(K) retirement plans and lower thresholds for investor participation. As such, private equity requires your attention.
Dry Powder & Scale
An easy metric to evaluate how this industry has scaled is the amount of “dry powder” waiting to be deployed. Dry powder represents the amount of capital available for investment, and the amount of private equity dry powder has been on the rise since 2012 hitting a record high of $2.5 trillion in December 2019 across all fund types. This peak represents a 5.0x multiple of the sum available in 2003. More than half of all available dry powder sits in North America.
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