Private Equity Benefits while the World Suffers

Industry continues to see extravagant returns while the world struggles to cope with an unceasing pandemic, read more.

In short:

• Private equity managers saw their fortunes increase like never before, resulting from necessary policies taken during the Covid pandemic
• The Big Four have been under increasing pressure as they fight back against private equity groups wooing some of their most talented employees
• What the future might hold for private equity

Private equity is a relatively shadow industry operating on an exclusive basis between the industry professionals, due to regulatory exemptions. Since private equity firms rely on institutional committed capital, they are not required to disclose any information to the public regarding their activities. Much has been developing in the industry recently, with managers in disbelief over their gains, most notably, during the pandemic. The Big Four are under increasing pressure in coping with the loss of some of their best at the hands of private equity recruiters. We must also bear in mind the significance of PE & VC to the economy, especially in times of Corona. I shall then conclude with a glimpse into the possible future for private equity.

In a corporate event in Berlin, at the invitation-only SuperReturn conference, private equity and venture capital executives ponder their own recent successes. David Blitzer, the billionaire Blackstone executive said, “I didn’t expect things would snap so dramatically, ” while addressing the 2000-person conference. In fact, because the market is so hot right now, the primary worry at the conference was fiscal and monetary policy lifting the performance of the poorly run private equity firms.

Figure 1

Figure 1 shows the rising amount of excess capital PE firms can recall from their investors, or ‘dry powder’. All PE public firms in the figure posted record earnings for this year, with the exception of Ares. It is important to note that these figures are in addition to a record-breaking year with many notable deals. An example of such deals include Hellman &  Friedman and Bain’s LBO of Athenahealth worth $17B.

Figure 2

Figure 2 illustrates the behemoth growth of deals involving private equity, therefore not the absolute number of deals but the change relative to the year prior. The figure illustrates a steady YoY change or growth since 2013 with a sizable drop in 2020. However, 2021 can obviously be seen as a record-breaker, forecasted to record a growth of around 55%(UK) and almost 30% globally.

Central banks’ necessary measures, along with substantial fiscal aid, gave way for a boost in PE deals, enough for the industry to reach new peaks. The considerable effort by many central banks and governments to keep their economies from entering into a recession assisted PE firms to gain access to cheap debt, keep hard-hit companies afloat, and even distribute dividends. With much to celebrate, the conference did not go without its fair share of warning speeches, in an effort to exit this stage of comfortable “collective delusion,” as Apollo’s co-president Scott Kleinman put it. Interestingly, a notable omitted subject matter was the industry’s continuous and successful efforts of poaching top talent from the Big Four.

The Big Four accounting firms are no stranger to the phrase ‘conflict of interest’ and it is that very phrase that is giving rise to many contemporary issues. Moreover, with the continued growth in the private equity and venture capital industry, PE firms look to fill up many positions either within their funds or at some of the companies they back. This issue is so prevalent that one PE firm, Alvarez & Marsal, has brought on over 50 senior advisers from the Big Four in Europe since 2017. However, this does not seem to instill fear within the accounting titans as they remain bullish over their future as it relates to retention of labor and internal expertise. The Big Four have been under increasing fire for allegations relating to their incapacity to effectively offer both consultancy and auditing services. They have also been the subjects of many contemporary or recent scandals, resulting in a general loss of confidence towards the auditing industry. Illustrious of these pressures, KPMG, PwC, and Delloite have all had to sell some form of an arm to their consulting services in recent years.

Figure 3

Figure 3 demonstrates the resiliency of the Big Four in deterring insurgents’ attacks from PE firms. KPMG is yet to publish their figures for 2021, as of the timing of this article. All firms show a continuous increase of their revenues.

In conclusion, with the pandemic’s associated uncertainties contemporarily looming over financial markets, it is difficult to predict whether we are headed for a wave of expansionary or contractionary policies. One thing we can predict with certainty - if interest rates remain low then PE firms are poised for growth. Conversely, if contractionary policies, to combat rising inflation, along with further loosening of restrictions is our imminent  future, then PE firms may not exceed this year’s figures. Overall, the trend of the PE industry seems to be an increasing share within countries’ GDP. Amongst the sources listed below are some articles on recent significant PE deals, for those who are interested in further readings.

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