Private Equity: Our Perspective

Private equity has gone from a specialist allocation to a standing line in almost every serious portfolio. The funds now manage more than seven trillion dollars, assets have grown by more than twelve percent a year since 2010, and private equity has risen from about four percent of the size of the public equity market in 2010 to roughly nine percent today. For a founder who has just sold a company, a family building a portfolio meant to last, or an institution setting policy for decades, the question is no longer whether to look at private equity. It is how much to hold, in what form, and through whom.

Our view, stated plainly and then defended below, is this. The average buyout fund has genuinely beaten public markets after fees, for a reason that is structural and unlikely to disappear. The average venture and growth fund has not. And in both cases the average is close to meaningless, because the distance between a strong manager and a poor one is far wider in private markets than in public ones. The decision that matters is not the allocation. It is the access.

How The Market Got Here

The rise of private equity has run alongside a long contraction in public listings. In the United States the number of companies going public each year has fallen from an average of around three hundred between 1980 and 2000 to roughly one hundred and twenty since, and the total count of listed companies has leveled off. Companies are staying private longer, and a growing number are choosing never to list at all. Deal activity has moved the other way. In a recent year the market saw more than nine thousand buyout deals and twenty-five thousand venture deals, and most buyout transactions now change hands between private owners rather than coming off the public market.

The reasons matter for anyone deciding how to invest. Private capital has become abundant enough that a good company can raise what it needs without the scrutiny and disclosure a public listing demands. More of what makes a modern company valuable now sits in intangible assets, which are often easier to fund and value among a small group of informed investors than in a public market that asks the company to reveal its hand. The practical result is that a rising share of real economic value is created inside companies an investor can only reach through private funds. That is the case for paying attention. It is not, on its own, the case for buying.

How A Fund Actually Works

A private equity fund is a limited partnership with a fixed life, usually seven to ten years. The investors are the limited partners. They commit capital and then wait for it to be called. The manager is the general partner. It sources the deals, makes the decisions, and charges for doing so. Capital is drawn down over the first few years, put to work through the middle, and returned as companies are sold. In the early years the fund usually shows a loss, because fees are charged before much value has been realised. That early dip is the J-curve, and it is the plainest reason the money has to be patient.

The strategies differ more than the shared label suggests. A buyout fund takes majority control of a mature company, usually with a meaningful layer of debt, and works to make it more valuable before selling in five to seven years. Venture capital buys minority stakes in young companies that have no settled economics, accepting that most will fail and a few will pay for everything. Growth equity sits in between, backing established but still-expanding businesses. Exits come through a sale to another company, a sale to another fund, which is where the secondary market comes in, or, less often than it once did, a public listing.

Where The Returns Come From

A buyout manager has three ways to make a company worth more. It can change the financing, mostly through leverage. It can change the governance, by owning the whole company, sitting on a small and engaged board, and tying management's rewards to the outcome. And it can change the operations, by improving how the business is actually run. For much of the industry's history, leverage and financial structuring did most of the work. As competition for deals rose and that kind of engineering stopped being a real edge, the balance shifted. Today, across the industry as a whole, operational and governance improvement is the larger source of value.

The governance point is worth dwelling on, because it is the closest thing private equity has to a structural advantage. A public company answers to thousands of shareholders, none of whom owns enough to hold management closely to account. A private-equity-owned company has a single owner with both the incentive and the control to act. That concentration does not make the model automatically better, and it comes at the real cost of liquidity and diversification. But it is genuine, and it is where a capable manager earns the fee.