Past, present, and future of private equity industry

Private Equity(PE) firms play acrucial role in the economy. They help small companies grow and generate good returns for investors. Especially during the time of crisis, they provide companieswith capital and industry expertise.

In this article, let’s understand the beginning of private equity, and how it is functioning currently, and what the future holds.

Beginning of private equity

During the middle of the 20th Century, PE firms were called buyout firms. They rebranded themselves as Leveraged Buyout firm (LBO) during the debauchery, rebranding for a second time into PE during the 1980s.

In an LBO, significant amounts of debt are used to acquire anorganization, with the assets of the acquired organizationused as collateral. Then, the cash flows of the acquired organizationare used to make the debt payments. As the debt is repaid, the equity proportion of the capital structure grows, generating gains for equity holders. This was a favorite strategy of PE funds since their boom and proliferation in the 1970s and 1980s.

Later the private equity industry went into a“Golden Age” in the mid-2000s. However, after the 2008 financial crisis and the resulting credit crunch, the cost of debt went up and as a result, the LBOs went down in popularity. LBOs were considered a predatory tactic done without the consent of the organizationbeing acquired.

Private equity today

The current state of the private equity industry has changed. Some of the current trends include:

·  Competition

PE firms have experienced a significant amount of trouble closing deals or even finding organizations at the right value. It’s hard to compete against strategic buyers like conglomerates, which are rich with cash to pay off debts and have short-term synergy opportunities to help the target organizations easily fit into their product portfolio. Deal prices get driven up, and with many conglomerates hiring PE executives to run their buyout arms, sourcing deals has become a lot more difficult.

·  Middle-market PE

Middle-market PE firms with an average minimum of $300 million to approximately $5 billion maximum in funds are running currently. They are more cautious investors and put significantly less into the deals. Pitchbook, an unbiased PE data provider, found that middle-market private equity deals were taking up the majority of deal volume, and they were getting bigger size. In the last few years, several middle-market private equity firms were winning deals.

· Mega firms adjusting to middle market

Large PE firms like TPG, KKR, Carlyle, THL Partners, have built up middle market buyout arms to adjust with the changed deal environment.

Leverage multiples (how much debt is put in versus equity) have dropped to around 2.5-3:1.

  • Pitchbook

Private Equity in future

The current state of the private equity industry is all well, but it is very important that it needs to be consistent, like the way the venture capital industry has inserted itself into the public spotlight. The future of PE will probably involve:

·  SEC focus on PE

The U.S. Securities and Exchange Commission (SEC) has declared that it will be focusing more on PE’s practices. If the PE industry continues to work onsmarter deals,it shouldn’t need to worry about any upcoming probes.

·  Advocacy group

The American Investment Council (AIC), formerly the Private Equity Growth Capital Council (PEGCC) is working on the carried interest tax debate. An advocacy group called the Association for Corporate Growth (ACG) has been collating data on privately-backed organizations vs. others within every state and district in the U.S. Moreover, they have been educating Congress about the PE industry.

End Notes

All these are considered as positive signs of the future. But it can also be said that the PE industry requires complete rebranding. The PE industry has transformed from buying majority stakes in companies, to offering expansion capital to rising stars within different industries and sectors.