Is private equity killing your pets? Probably not – though that was the question posed by one US media outlet this week.
It’s an all-too-familiar story: mainstream media lambasts the private equity industry for asset stripping, cost cutting and corporate raiding. Populist politicians, keen to capitalise on the sentiment, launch tirades and sponsor bills to rein in Wall Street’s so-called fat cats. The commotion dies down until the next example of PE gone wild hits the headlines.
Amid this cyclical backdrop, you could forgive private equity participants for not being overly concerned with spending their time trying to improve the industry’s public image. And why should they? Immediate challenges such as the difficult fundraising environment, the rising cost of borrowing and volatile global markets means many in the industry have their hands full.
Yet, there are reasons why the industry needs to tell its story better. And not just the story of outsized returns for investors, but of its role in backing real businesses and delivering on operational improvement.
For starters, private markets find themselves at an inflection point where their capital is financing more of the real economy than public market capital. According to figures compiled by Partners Group, total private markets AUM overtook public equity issuance in 2016 – a trend that has continued ever since. This role reversal is happening amid the biggest recalibration of the macro economy in decades, argues Steffen Meister, executive chairman at the Switzerland-headquartered firm.
“In that sense, [private markets’] share of financing the real economy is much higher than public market IPOs,” Meister said, speaking to more than 200 PEI Group staff when he visited our London office to discuss his findings last week.
It’s no secret that public markets financing has become less attractive of late, with the number of listed companies plummeting in the US and the UK. Critics cite burdensome regulation, and a misguided emphasis on governance for governance’s sake.
“Who’d want to be CEO of a small, listed company nowadays?” says Jeremy Hand, a veteran of UK lower mid-market investing. Hand recently shared his thoughts with us on his three decades in the industry, having retired from his role last month as chair of lower mid-market investor Horizon Capital, formerly Lyceum Capital.
“It’s tough to access capital [for small listed companies],” says Hand, who spent a year as chair of the British Private Equity and Venture Capital Association in 2009. “It’s cyclical, you’ve got a whole lot of regulation, you’ve got shareholders that are constantly selling and buying, you can’t borrow very much, you can’t earn very much, and if you put one foot wrong or if you try investing for the long-term you probably get penalised for it.” The appeal of private equity is therefore a compelling one, he adds.
There are moves to both address and benefit from the role reversal between public and private markets. In the US, members of a House Financial Services Committee subcommittee met last week and agreed that burdensome regulations have resulted in companies staying private for as long as possible, as our colleagues at Private Funds CFO have chronicled. One suggestion for encouraging more companies to go public is to extend the period during which they can have ‘emerging growth company’ status, which aims to ease companies into public markets by temporarily shielding them from full accounting and disclosure regimes.
In the UK, it was reported this week that opposition leader Keir Starmer and shadow chancellor Rachel Reeves had met with senior executives from firms including Blackstone, Advent International and Brookfield Asset Management to discuss the role private capital has to play in boosting economic growth in the UK and financing the energy transition, the FT reported. We don’t know the details of what was discussed, though the fact that these discussions were happening at all suggests private markets may have an even bigger role to play down the line.
As private markets gain ground over public markets; as political leaders seek ways to encourage more private capital investment; and as more true retail capital seeks exposure to PE-backed companies, expect the industry to be subject to more intense public scrutiny – and justifiably so.