Essentials of Private Equity
Private Equity: What You Need to Know
Vast Market Opportunity
The universe of private equity (PE) is vast given that most companies globally are privately held.1 Endowments and other institutional investors have maintained sizable PE allocations for decades, and more individual investors are following suit.2
History of Outperformance
Private equity has outperformed stocks with lower volatility over the long run.3 As a result, private equity can be a core portfolio block for investors in search of diversification and enhanced performance.4
Private equity managers have extensive value-creation capabilities, which they can use to unlock growth potential over time in the companies in which they invest. These efforts create
the potential for a higher return,
but investors must trade off some
liquidity to pursue this “illiquidity
premium,” as it is often called.
Joe Baratta, Global Head of Private Equity, discusses the evolution of private equity, the advantages of the private market, private equity’s historical outperformance, and Blackstone’s approach.
Understanding Private Equity
Private equity consists of investments in privately held companies, ranging from early-stage growth companies to large enterprises across every industry and geography. Private companies are a critical part of the global economy5 and can take a longer-term orientation than the focus on share-price fluctuations of many public companies.
Private equity investors can help these businesses grow through active engagement and value creation strategies, including reshaping leadership, operations and financials.
Historically, return generation in private equity has been attractive,6 and is derived from earnings growth and multiple expansion by exiting at opportune moments.
Private Investment Opportunities Substantially Exceed Those in Public Markets7
Breakdown by Revenues: Private Companies are a Critical Portion of the Global Economy7
Source: Capital IQ; based on global data available in Capital IQ’s database, August 2023. Measuring companies with revenues of $250m+ annually.
Investing for the Long Run
In exchange for making illiquid investments, investors seek a higher return than they might achieve holding liquid equities. This offset is known as the illiquidity premium. Even with recently available semi-liquid funds designed for individual investors to allow for periodic redemptions, private equity remains an asset class that aims to reward long-term investments. Over time, private equity has delivered meaningful long-term outperformance with less volatility versus public markets.
Growth of $100,000 Investment in Private Equity vs. Public Equities
Source: Cambridge Associates, as of March 31, 2023. Note: Growth of $100,000 based on cumulative returns from January 1, 2007, to March 31, 2023, in order to capture performance throughout the Global Financial Crisis. Past performance does not predict future returns. “Private Equity” is represented by the pooled returns of the blended Cambridge Private Equity Index, which is comprised of buyout funds, secondary funds, and growth equity funds. ”Public Equities” are represented by the Cambridge Modified Public Market Equivalent (“PME”) analysis of the MSCI ACWI Index. Comparisons of private equity performance to an index is therefore based on the difference in performance between Cambridge Private Equity Index IRR and the hypothetical PME return of the applicable public index. Hypothetical PME index performance may differ materially from the performance of such index during the same time period on account of the adjustments made for the timing of cash flows as per the PME analysis. Returns shown above have been compounded quarter over quarter to show comparison over time and may not be representative of actual historical returns experienced by investors in either Private Equity or Public Equities. Indices are provided for illustrative purposes only, and there are significant risks and limitations to relying on comparisons to an index, including the PME adjustments. Public Market Equivalent (“PME”) methodology replicates the date and amount of cash flows from Cambridge Global Private Equity Index capital calls or distributions in a public market index (i.e., Russell 2000, S&P 500). The hypothetical returns generated by these cash flows then track the public market index performance with the hypothetical PME NAV at the end of a given quarter used for the hypothetical PME Index IRR calculation. Comparisons of Cambridge Global Private Equity Index performance to an index is therefore based on the difference in performance between Cambridge Global Private Equity Index IRR and the hypothetical PME IRR of the applicable public index.
Private Equity: A Core Allocation
Private equity has traditionally been an illiquid asset class primarily accessible to institutional investors, such as pension funds and university endowments, who could accommodate the long (typically 7-10+ years) investment horizons that private equity managers need to drive valuation creation.
Institutional Investors Have Long Made PE a Core Part of their Portfolios
Note: All allocations are as of 2021 except for Yale University Endowment, which is a 2021 target allocation, the latest available, as of 2021. Yale University Endowment selected as the most widely followed US university endowment. Private equity allocation includes “leveraged buyouts” and “venture capital.” UBS Global Family Office Report 2021. Private equity allocation is only representative of family offices in the US Mid-to-low single digit industry average alternatives allocation estimate is based on Money Management Institute, “Retail Distribution of Alternative Investments,” 2021. <3% Average Individual Allocation source: Bain & Company, “Global Private Equity Report,” 2023.
Unlocking Value in Portfolio Companies
Private equity managers’ value creation capabilities fall into three broad categories:
Long-term Business Transformation
Managers strive to unlock growth potential over time to take high-performing companies to the next level.
Building a High-Caliber Management Team
Managers can strengthen or reshape management teams in ways that are not possible for most public equity investors.
Synergies Across Portfolio Companies
Large-scale managers can create synergies between portfolio companies by leveraging functional expertise and networks to help improve operating performance.
The Value-Creation Toolkit Utilized by Private Equity Managers
A CASE STUDY
Refinitiv: Value Creation at Work8
Refinitiv is a financial and economic data, news, analytics, and workflow solutions platform carved out from the Financial & Risk division of Thomson Reuters. Key highlights:
- Built new product offerings leveraging Blackstone’s alternatives experience and leveraged Blackstone’s relationships to accelerate sales.
- Spun off the electronic-trading subsidiary Tradeweb in a 2019 IPO valued at $18 billion, unlocking value for investors.
- Upgraded executive leadership team and streamlined organizational structure.
- Refinitiv merged with the London Stock Exchange Group in January of 2021, creating a leading global financial data and infrastructure provider.
Read the complete Essentials of Private Equity
Essentials of Private Markets
Learn how assets such as private real estate, credit and equity can fit into investment portfolios.
- Capital IQ; based on global data available in Capital IQ’s database, August 2023. Measuring companies with revenues of $250 million-plus annually.
- Yale Endowment Office, UBS, Money Management Institute, as of 2021, which is the last available.
- Morningstar, Cambridge Associates, as of 3/31/2023. Private equity is represented by the Cambridge Associates US Private Equity Index. Public Equity is represented by the S&P 500 Index. Return is calculated using quarterly returns from 4/1/1986-3/31/2023 and is annualized over the period.
- Diversification does not guarantee a return or protect against a loss.
- See note 1 above.
- See note 3 above.
- See note 1 above.
- Such case studies and/or transaction summaries presented or referred to herein may not be representative of all transactions of a given type or of investments generally and are intended to be illustrative of the types of investments that have been made or may be made by a Fund in employing such Fund’s investment strategies. It should not be assumed that a Fund will make equally successful or comparable investments in the future. Moreover, the actual investments to be made by a Fund or any other future fund will be made under different market conditions from those investments presented or referenced in the Materials and may differ substantially from the investments presented herein as a result of various factors. Prospective investors should also note that the selected investment examples, case studies and/or transaction summaries presented or referred to herein have involved Blackstone professionals who will be involved with the management and operations of a Fund as well as other Blackstone personnel who will not be involved in the management and operations of such Fund. Certain investment examples described herein may be owned by investment vehicles managed by Blackstone and by certain other third-party equity partners, and in connection therewith Blackstone may own less than a majority of the equity securities of such investment. Further investment details are available upon request.
- Returns are annualized and net of fees.
- Annualized returns are presented on an annualized basis over the time period from January 1, 2007 to March 31, 2023.