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Private markets propelled by ‘push and pull’ have grown exponentially

The Economist | Feb 23, 2022

private markets growth - Private markets propelled by 'push and pull' have grown exponentiallyDealmaking is at record levels. The global value of disclosed leveraged buy-outs reached $1.2trn in 2021, far above the previous record of $800bn in 2006 made up a fifth of all mergers and acquisitions, its highest share for at least a decade.

Besides buying assets from corporate owners and founders, private funds buy from each other. Some firms have been through three or four PE funds’ hands. In America, secondary buy-outs can exceed the volume of initial public offerings, the usual route for investors to cash out, says the Bank for International Settlements (bis), the central bankers’ bank.

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The boom is part of a broader expansion of private markets. Top-tier firms that once focused on leveraged buy-outs, such as Blackstone, KKR and Carlyle, now look just as keenly for opportunities in private debt, real assets such as property and infrastructure, and “growth equity”, which sits between venture capital and buy-outs. More than two-thirds of the industry’s dry powder is earmarked for investments other than buy-outs. Since 2010 buy-outs have gone from 80% of KKR's business to less than half.

These market leaders are now “one-stop capital providers” for firms less able to tap traditional sources such as banks and public markets, says the BIS.

Such diversification (along with stratospheric pay) has cemented their reputation as the new kings of Wall Street. Today’s business-school graduates may now be more likely to seek a career in private markets than in investment banking. Last year Blackstone had 29,000 applicants for just over 100 analyst jobs.

Boom back bigger

The financial crisis hit pe, but it bounced back, fuelled by cheap debt as interest rates fell. Even the arrival of covid-19 in 2020 did not knock it for long. Dealmaking froze briefly, but pe firms moved to shore up portfolio firms that needed help or as an opportunity to buy cheap assets. m&a activity took off again later that year.

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Private markets have been propelled by push and pull factors, says Mohamed El-Erian, chief economic adviser at Allianz, an insurer, and a former boss of pimco, a bond-fund manager. The main push factor was ultra-loose monetary policy, which drove investors towards illiquid markets that offered higher yields. Another was the retreat of banks in response to tougher capital requirements and post-crisis laws (such as Dodd-Frank in America) that discouraged or prohibited them from betting with their own balance-sheets. Private funds gleefully took up the slack.

As private markets have grown, more young firms have chosen to delay going public. The average age of companies doing an IPO in America was eight years in the 1980s and 1990s. The average since 2001 has been 11 years.

As companies stay private longer, “more investors are looking to get in at that pre-IPO stage, as that’s when most of the wealth creation happens,” says Ben Meng of Franklin Templeton, a fund manager.

Some firms opt not to go public at all, confident of raising enough capital privately, says Byron Trott, head of BDT Capital Partners, a merchant bank for family firms. Of the 40 companies BDT has invested in since 2009, only three have gone public.

Not that the public markets are down and out. Last year was a record one for ipo listings. Firms going public also have other routes, such as direct listings or mergers with special-purpose acquisition companies (spacs), which landed with a bump after a boom in 2020-21 but are unlikely to disappear.

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