PEI 300: The decade that changed private equity

Over the last 10 years the industry has transformed from the pre-GFC leveraged buyout model to one based on building stronger business. What are the elements that went into that transformation?

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On its first quarter earnings call in April, Scott Nuttall, the co-president and co-chief operating officer at KKR (3) told the story of how the firm built itself up over the last decade from a private equity firm with a young US-centric credit business to an asset manager with 24 business lines to allow it to have a more powerful offensive strategy when the next crisis hit.

“The last crisis was critical developmentally for us. We made some great investments, we made large and important moves for the firm strategically, and it was an inflection point that drove us to meaningfully expand our business in the years post-crisis.”

KKR isn’t the only firm that’s evolved during this time. In the last decade the private equity industry has transformed from a pure financial engineering play to a model focused on building better businesses that provides tailored capital.

PEI 300 2020 Main graphic
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Along with the rest of the PEI 300 ranking, we lay out six of the biggest industry-wide changes that have taken place over the last decade to bring the private equity industry to where it is today: the uptick in co-investments; the shift from financial engineering to operational value creation; the growing importance of ESG; the rise of private credit funds; the move from generalist investment strategies to specialist focuses; and the maturation of the secondaries market.

Lessons from the GFC

As world economies plunge deeper into negative territory brought about by the coronavirus pandemic, it’s worth thinking about what the industry learned from the last crisis.

Nuttall said KKR is “viewing this crisis as providing similar opportunities” to the last one in terms of firm growth, and during times like this, KKR can use its balance sheet to be “aggressive”, including for new investments, strategic acquisitions and for buying back its own stock.

The balance sheet strength of the largest firms in the private equity business – particularly the listed ones – is well known, and certainly positions them well for the sort of explosive growth Nuttall was talking about.

But thanks to the rise in GP stakes investments there are firms further down the PEI 300 with balance sheet firepower. Michael Rees, head of Dyal Capital Partners – a unit of Neuberger Berman (6) – told sister title Buyouts in May that minority capital helps position firms for upside opportunities in a pandemic-spurred slowdown.

“Raising a sizeable amount of permanent capital eliminates liquidity issues for private equity firms,” Rees said.

If the next decade is anything like the last, in 2030 we could be looking at a very different industry.