How PE luminaries see the future of private equity

Blackstone, Carlyle and TPG share their views on how regulation, diversification and fintech are changing the nature of the industry.

Prominent members of the private equity community have delivered their verdicts on the future of the sector.

EY’s How can private equity transform into positive equity? report gathered insights from a range of industry participants on the direction of a market awash in dry powder. It is also a vastly bigger market than it was a decade ago – the number of firms has grown by almost 50 percent to more than 7,000.

Blackstone chief executive Steve Schwarzman identified the potential for a major regulatory reset as one of the most promising aspects of the current administration. His comments follow reports that various sections of the US government view the Volcker Rule – which prevents US banks from making certain types of investments – as “imperfect” and in need of simplification.

“We will see an entirely new regulatory approach that will accelerate the growth of the economy, job creation and all kinds of other things that benefit investors,” Schwarzman noted in the report.

Some in the industry may not be around to see these changes, according to Glenn Hutchins, co-founder of Silver Lake. Private equity is in a “deconstructive” phase and undergoing a “slow-motion shakeout,” he added.

GPs leave the industry slowly due to long-term commitments from investors, Hutchins noted.

“Firms that are unsuccessful in one part of the cycle stay around for a long time and only go away or get downsized to very small levels over an extended time period. The firms that are doing well in this fundraising cycle will be the ones that did well in the last downturn and came out as the winners.”

Those who remain in the sector are likely to have diversified. David Bonderman, founding partner of TPG Capital, attributed this expansion in part to limited partners, such as pension funds, seeking fewer, but more in-depth, relationships.

Diversification is also being driven by the largest players trading on public markets. “The public markets like broad-based earnings, as opposed to the lumpy ones the PE business gets,” Bonderman said.

Domestic investors in UK public markets owned £5.5 billion-worth ($7.3 billion; €6.2 billion) of shares in direct private equity investment trusts – such as HgCapital Trust and JZ Capital Partners – in as of June, up from £3.8 billion at the same point last year, according to data from Radnor Capital Partners.

There will still be opportunities within private equity for those who know where to look. David Rubenstein, co-founder of Carlyle, noted firms would be wise to pay close attention to fintech companies, as innovation is often driven from outside a core industry.

“Fintechs are the logical ones to watch because they’re experimenting,” Rubenstein said. “You’ve got a lot of people looking for new areas.”

Private equity firms are already being drawn to this nascent sector. Earlier this year, Ping An Insurance Group launched a $1 billion fund targeting fintech and health-tech businesses globally, largely excluding China.