The Economist (2022-02-26) Riva

4 SpecialreportPrivatemarkets TheEconomistFebruary26th 2022

WallStreet.Today’sbusiness-schoolgrad-

uatesmaynowbemorelikelytoseekaca-

reerinprivatemarketsthanininvestment

banking.LastyearBlackstonehad29,000

applicantsforjustover 100 analystjobs.

Thegrowthofprivatemarketshasac-

celeratedsincethefinancialcrisisof2007-

09,outpacingpublicmarkets.Atitspre-

crisispeak,theprivate-capitalindustry

hadsome$2.2trnundermanagement.To-

dayitmanagesfourtofivetimesasmuch,

alittleoverhalfofitinNorthAmerica.

Theprivate-marketspartyhasboosted

profitsandshareprices.In 2021 theindus-

try’supperrankspostedrecordresults,and

publiclylistedpefirmsenjoyedbench-

mark-beating share-price gains. Black-

stone’sandkkr’ssharepricesdoubled.

The average profitability of alternative

managersiswellabovethatofbanks(albeitmorevolatile).The

BostonConsultingGroupreckonsalternativemanagerstookin

morethan40%ofglobalasset-managementrevenuesin2020.

Sincetakingoffinthe1980s,pehasseentwoboom-and-bust

cycles.Thefirstboomwasdrivenbyswashbucklingdealmakers,

epitomisedbykkrco-foundersHenryKravisandGeorgeRoberts.

Itsemblematicdealwasthehighlyleveraged$25bntakeoverof

rjrNabiscoin1988.Thefirstbustsoonfollowed.Thesecond

boom,startinginthelate1990s,sawtheindustryscaleupandex-

pandbeyondequityandoutsideAmerica.Severalmanagers,start-

ingwithBlackstone,tookadvantageofittolisttheirownshares,

monetisingfeeincomeandgivinggpsmoreexitoptions.More

havesincedoneso.tpg,aSanFranciscoleveraged-buy-outfirm

withsome$110bnofassets,listedontheNasdaqinJanuary.

Boombackbigger

Thefinancialcrisishitpe,butitbouncedback,fuelledbycheap

debtasinterestratesfell.Eventhearrivalofcovid-19in 2020 did

notknockitforlong.Dealmakingfrozebriefly,butpefirmsmoved

toshoreupportfoliofirmsthatneededhelporasanopportunity

tobuycheapassets.m&aactivitytookoffagainlaterthatyear.

Privatemarketshavebeenpropelledbypushandpullfactors,

saysMohamedEl-Erian,chiefeconomicadviseratAllianz,anin-

surer,andaformerbossofpimco,abond-fundmanager.The

mainpushfactorwasultra-loosemonetarypolicy,whichdrove

investorstowardsilliquidmarketsthatofferedhigheryields.An-

otherwastheretreatofbanksinresponse

totoughercapitalrequirementsandpost-

crisislaws(suchasDodd-FrankinAmeri-

ca)thatdiscouragedorprohibitedthem

from betting with their own balance-

sheets.Privatefundsgleefullytookupthe

slack.Amongpullfactorsareinnovations

suchasprivate-debtandproperty-invest-

mentfundsthatweredesignedtoappealto

wealthyindividualsandinstitutions.

Asprivatemarketshavegrown,more

youngfirmshavechosentodelaygoing

public.Theaverageageofcompaniesdo-

inganipoinAmericawaseightyearsinthe

1980sand1990s.Theaveragesince 2001 has

been 11 years.“Privateequityhasredefined

itsroleasawaystationtothepublicmar-

kets,”saysChipKaye,bossofWarburgPin-

cus,apefirmfocusedon thinvesting.

Ascompaniesstayprivatelonger,“moreinv sarelooking

togetinatthatpre-ipostage,asthat’swhenm ofthewealth

creationhappens,”saysBenMengofFranklin leton,afund

manager.Somefirmsoptnottogopublicatall, dentofrais-

ingenoughcapitalprivately,saysByronTrott,h fbdtCapital

Partners,amerchantbankforfamilyfirms.Ofthe 40 companies

bdthasinvestedinsince2009,onlythreehavegonepublic.

Notthatthepublicmarketsaredownandout.Lastyearwasa

recordoneforipolistings.Firmsgoingpublicalsohaveother

routes,suchasdirectlistingsormergerswithspecial-purposeac-

quisitioncompanies(spacs),whichlandedwithabumpaftera

boomin2020-21butareunlikelytodisappear.Yetataround

4,000,thenumberofpubliclylistedAmericanfirmsisfarbelow

itspeakofnearly6,000inthemid-1990s.Onereasonisthatinves-

torsseedisadvantagesinpublicownership,includingonerous

disclosurerequirements,quarterlyearningspressureandattacks

byactivistinvestors.

Atpe-ownedfirms,theactivistsareontheinside.Ownerswork

closelywithmanagerstoshapestrategyandcapitalstruct

Theyrewardsuccesshandsomelywhilepunishingfailurefa

thantheownersofpublicfirms.Donecorrectly,thiscanincr

valuebynarrowingtheinformationgapbetweensharehol

andmanagement,reducingagencycosts.Theendowments,pen-

sionfundsandotherinstitutionalinvestorsthatfuelprivatemar-

ketsarebelievers.Theythinklargeallocationstoalternativein-

vestmentsofferthebesthopeofhittingannual-returntargetsfor

theirportfoliosthataretypicallyinthehighsingledigits.

Butastheindustryentersitsthirdage,itfaceschallenges.One

istheprospectofsustainedhigherinflationandinterestrates.

Cheapdebtispe’slifeblood.Ariseofacoupleofpercentagepoints

inthecostofborrowingisunlikelytoleadtosurgingbankrupt-

cies.Butmorethanthatmight.Asmorecapitalhasflowedinto

privatemarkets,pricesforassetshaverisensofarthat“thereislit-

tleroomforerror,”saysBain&Company’sMrMacArthur.Forbuy-

outstheaveragepricetagrelativetoearningsisatanall-timehigh.

Asecondworryisgreaterscrutiny.Privatemarketsarelightly

regulatedandopaque.Regulatorswantmoretransparency,espe-

ciallyonfeesandperformancemeasures.Supervisorswantto

knowhowprivatemarketsmightaffectfinancialstability.Thein-

dustrymustalsonavigategeopolitics,notablythereassessmentof

thevirtuesofforeigncapitalbyChina,untilrecentlyabigpartof

manymanagers’plans.ThecollapseinSeptemberofBlackstone’s

$3bndealtobuysohoChina,apropertydeveloper,augursill.

Thefinaltestcomesfromwithin:generationalchange.Many

whoshapedtheindustryareleaving.MrKravisandMrRoberts

handedovertonewco-headslastyear.StephenSchwarzman,

A private party

Global asset values, 2000=100

Source:McKinsey *H

,

,

,

7

2000 05 10 15 21*

Publicmarket

capitalisation

Private equity net

asset value

America leads the way

Private markets, assets under management, October 2021, $trn

Source:BankforInternationalSettlements *March 

Restofworld

Asia

Europe

NorthAmerica

6543210

Drypowder*

0.03

0.5

0.8

1.6

Private equity Realassets Privatecredit Venture & growth capital