The private equity industry is growing at an unprecedented pace, shaping the investment landscape. This is evident because businesses in the U.S. have raised more money through private equity than in the public market during the last 10 years. The pace of this trend is gradually increasing. In the next few years, the number of investors is expected to grow dramatically as eligibility for investors becomes liberal. US private equity firms are feeling the surge
Consequently, the growth of the private equity market is opening new opportunities for investors. Several institutional investors are heavily invested in private equity more than ever. On the other hand, new regulatory changes in private equity are facilitating easy investment, thereby garnering heavy interest from investors and private equity investment professionals.
Amid the pandemic, private equity has become a large part of the portfolio for investors, making it essential to evaluate PE investments for investors. This also gives rise to the need for a framework for evaluating PE investments. Unlike public equity, where investments can be easily benchmarked, private equity investments can’t be done. This possess a great challenge for private equity investment professionals, investors, and asset managers.
The sudden and gradual shift to the private market
The way companies raise capital has undergone a significant transformation over the last century. Businesses have a plethora of alternatives to raise capital from public to private investors. The private market has become a go-to option for businesses to raise capital, evident from the falling number of public companies. The number of U.S.-listed companies fell to 4,400 in 2019 from 8,000 in 1996. While the absolute number has changed, the notional value of capital has shifted from the private market to the public. In 2018, private equity provided 5 times more capital than the public market (IPOs). This isn’t just limited to the U.S. market. US private equity firms and PE firms elsewhere are gearing up to accommodate the changes.
Institutional investors are eager to contribute to this shift and demand from them is making the transition easier. As regulators become liberal in their approach to who can access private equity, the demand from retail investors will rise. In June, an information letter issued by the U.S. Department of Labor clarified the use of private equity in professionally managed funds offered in defined-contribution retirement plans such as 401(k)s. Further, recent regulatory changes have a high impact on the opening of private markets to a broader swath of wealthy retail investors.
The adoption of private equity will probably come through target-date funds that offer a diversified portfolio and gradually shift asset allocation over time as workers age. What’s more, in August, the SEC expanded the definition of “accredited investors” or “qualified investors”. This expansion of definition will broaden the range of investors who can access the private market. In brief, now more investors can access the private market, leading to more capital in the market and creating greater and better opportunities for businesses to raise capital.
Private markets will continue to increase their role in global capital markets. As PE investments become more accessible to capital seekers, investors will increase their allocations to private equity as part of their investment portfolios.
Further, unlike public equity, investors don’t have access to benchmarking tools and analytics that enable them to make sound investment decisions. The nature of the private equity market inherently has no perfect way to evaluate private equity investment returns. Investors, however, can use a combination of indexes to accomplish their goal of measuring their investments.