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Private equity funds are changing our world today

How do companies grow? In the past, they would rely on private capital, talent, experience, and banks. If they survived this first stage, and still have great potential, they could consider an initial public offering (IPO) on the stock market, and then after they are established, they could also turn to the bond market.

Those things still exist, but increasingly, the capital behind growth around the world is a product of private equity funds and not public markets. In private equity offerings, deep pools of money are used to make direct deals, in what companies see as a more cost-effective and flexible approach to providing the resources needed for growth. 

What Is Private Equity? 

Investopedia defines Private Equity as: “an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies. Private equity firms make money by charging management and performance fees from investors in a fund”.

It’s not new, It’s the way J.P. Morgan, the private banker, worked in shaping the US steel industry. In the decades after World War II, private banking was overshadowed by Global Stock Exchanges that provided access to liquidity, which helped make equities widely held among global investors, while traditional banks were the main source for start-up loans.

What is happening now? Traditionally Private Equity was reserved for ultra-high net worth families or Institutional investors that had the resources to invest large amounts in one trance, but now Private Equity is entering the mainstream, fueled by technology that allows crowdfunding or investment funds that can register on exchanges with minimal cost (the cost of an IPO can be over one million USD without a guarantee of success and a Private Equity fund would cost less than 5% of this). 

Why Do Companies Go Down This Route? 

Selling equity over borrowing – What seems logically fair? Getting into more debt (if they already have), borrowing more, paying more compound interest month after month, and a horrendous late fee penalty if you miss the monthly installment, offering a particular percent stake of your company in a private equity deal?

In this scenario, no pledging their personal assets, no monthly payments, no compound interest. Instead, companies can reduce the debt ratio (if any) and stabilize their balance sheets.

Cash CushionWhether they are trying to bring their talent or ideas to the market for the first time or expanding and scaling, they need funds at every stage of the business. Innovation, R&D, supply chains, marketing, getting, and keeping skilled talent, and everything that supports business growth demands cash resources, doesn’t it? Not to mention the uncertain situation like the pandemic that turned the situation overnight, throwing some companies into the dark hole questioning how they will even pay the salary, rent, bills, and overheads and protect themselves from sinking.

Leadership: Technology is advancing at lightning speed. And consumers are expecting an enriched, smoother, upgraded, and modernized experience at every level. Big giant corporations with deep fat pockets are continuously innovating and advancing their technology in every artificial intelligence, digitization, virtual reality, and the internet. Private Equity allows companies to compete. 

Success: Sometimes businesses are so close to the tree that they can’t see the forest. To succeed in any business, they must constantly move up the hill. The truth is the market is so fiercely competitive that if you are not 100% committed to success, your competition will eat your lunch without a burp. PE funds want the business to grow because it’s in their interest. They will support the business at the forefront. 

How Big Is the Private Equity Market Today?   

Assets in global private markets totaled $10 trillion in September 2021, nearly five times as much as in 2007. Public markets are still far bigger but have grown more slowly, roughly doubling in the same period. In the US, companies that have stayed private have raised more money than those whose securities trade in public markets every year since 2009, according to a Morgan Stanley 2020 report. In debt markets, private credit represents a fraction of the financing provided by banks or publicly traded bonds but doubled globally over the last five years to $1.2 trillion.

What Is the Driver of Private Equity Funds? 

According to Deloitte research, Private Equity investment growth has been driven by the public who have never had the ability to invest in this asset class, the asset class has the potential to expose clients to the initiation, and be richly rewarded for successful performance, clients should approach investment in Private Equity with a clear-eyed, honest appraisal of both the risks and rewards it entails.

Summary: we live in an exciting new world and are swimming in uncharted waters, never before have so many had access to invest in the fastest growing stage companies and Private Equity is exposing more and more people every day to this exciting asset class. The market has increased by 500% in 15 years, and it should grow another 500% in the next five years. 

About the Author
Dan Dobry was the founder and a director of the GlobalNET Investment House, he was one of the founders of the Union of Financial Planners in Israel (UFPI) and served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and was a member of the Committee for Standards and Qualifications for the European Union (SQC) until December 2021.
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