The past 20 years have been a period of tremendous growth for the private equity industry. But as it has grown in popularity, it has come at the cost of a decline in publicly traded companies, including in SA. 

From its roots in the 1970s and 1980s in the buyout and venture capital spaces, private capital has expanded dramatically in scope and scale. Funds have become larger, the investor pool has broadened and the largest players have transformed themselves into fully diversified alternative asset managers, with offerings across a wide range of geographies and asset classes. 

According to Burgiss data, between 1998 and 2018 the number of active buyout, real estate and credit funds grew from slightly more than 900 to more than 5,500. Net asset values have grown even faster — more than 15-fold, from about $130bn (R1.9-trillion) in 1998 to roughly $2-trillion today. 

Burgiss operates in the US, Europe and SA and analyses behavioural data on 9,500 private capital funds and fund of funds worldwide. 

Most indicators point towards continued growth in the number of funds and their net asset values (NAVs). Indeed, the past three years have seen record amounts of capital raised by the industry, driven by increased allocations and recycled distributions by existing investors in the space, as well as new entrants to the asset class, such as high-net-worth individuals, family offices, sovereign wealth funds and pension funds in many emerging markets. 

Concurrent with private equity’s growth is a measure of stagnation in the public markets. It’s become clear that the model of public ownership is increasingly falling out of favour, at least for many companies in the middle market and those in the more growth-orientated stages of their maturity curves. 

According to the World Bank, in the US the number of publicly listed companies is down almost 50% over the past 20 years; similar trends are evident in much of Europe. In SA there are 62% fewer listings on the JSE now than at its peak number of listings. 

While the number of public companies changes from year to year and decade to decade, what we’ve witnessed is a steady decline over the past 20 years. In addition to the rise in private equity there are other forces that play a role, with the most significant being: 

  • Increased activity in mergers & acquisitions, driven by sponsor-led leveraged buyouts and corporates seeking to drive growth via acquisitions. 
  • A dearth of initial public offerings. New companies are staying private longer — for example, in the US the number of public companies has decreased 50% over the past two decades, according to research from the University of Florida.

It is important to understand the implications of these trends to grasp the future of private equity and its role in the capital markets. Where are we in the evolution of the private funds market? At what point might a new equilibrium be reached between public and private capital?

Changes in where companies raise capital can have important implications for investor returns and corporate growth. Private equity firms can benefit from a better and more holistic understanding of their investable universe. Entities that invest primarily in the public markets can benefit by understanding the shift towards private capital and the implications on their portfolios if they fail to adjust. 

What are the macro implications? 

With this evolution come a number of questions — perhaps most significant are those around the economic effects of these shifts. Private equity ownership has historically been observed to carry with it a range of impacts on its portfolio companies and the broader economy. 

Private equity ownership, for example, is associated with measurable benefits in productivity, and private equity-owned companies are shown to raise competitive standards in their industries, causing entire sectors to become more productive. If current trends continue and more economic activity moves to businesses with a private ownership model, will these effects continue to hold? 

We believe they will; private equity serves a special role vis-à-vis public markets in that it facilitates certain types of value-added changes to business operations that are more difficult to do in public companies with a more diverse shareholder base. 

The key point is that private equity is not “buy and hold” and is instead centred on various types of change, often transformational in nature. 

• Stokoe is Africa private capital leader at EY Africa.  

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