Enduring Opportunity in Private Equity

In the long run, private equity is inexorably gaining market share:

“The number of US public companies has declined by about a third over the last 25 years […] Private market returns, meanwhile, are outpacing public returns over every time horizon […] These advantages explain why private markets continue to grow relative to the public markets.” [See source.]

In fact, 85% of employment in the US is in the private sector according to the US Bureau of Labor Statistics—more than 118 million employees. Specifically, the “private equity industry and private equity-backed companies directly employed more than 11.7 million workers in the United States in 2020 and generated $1.4 trillion of gross domestic product (GDP), or approximately 6.5% of total GDP” [See source].

However, the second half of 2022 and now the outlook for 2023 reveal a stormier period in private equity’s (PE’s) smooth sailing. McKinsey quips: “The music didn’t stop, but someone turned it way down […] Banks began to pull back, unwilling or unable to lend. Private markets deal volume plummeted, performance declined, and valuations fell—dramatically in certain sectors. Still, private markets outperformed public markets on the way down, whether due to truly more resilient portfolios, a lag in timing, or manager discretion […]” [See source].

In a nutshell, PE fundraising has slowed dramatically: “Global private markets fundraising declined by 11 percent to $1.2 trillion.” [See source].

The chill was not uniform.

McKinsey notes the following key trends (See source):

• North American fundraising was resilient; Europe and Asia faced challenges
• Investors fled to known names and larger funds
• Dry powder inventory spiked / PE multiples contracted
• PE posted negative performance for the first time since 2008
• Real estate served as an inflation hedge
• Sustainable investing gained scale

On top of the post-pandemic corrections, war in the Ukraine, energy market upheaval, inflation spiking, and interest rates rising rapidly, in early 2023 there came the Silicon Valley Bank (SVB) shock to the system setting off a number of dominoes across the international banking system. PitchBook reports, “Venture-backed companies were already facing a capital crunch after market volatility forced investors to slow dealmaking and set higher benchmarks for financing—and now startups’ debt financing options have also taken a hit. Other banks and lenders are stepping in, but no matter how quickly they may be able to stem the fallout, SVB’s collapse is sure to irrevocably change the inner workings of the VC industry.” [See source].

So what is the outlook for PE going forward, particularly for executive employment?

Bain Capital offers an excellent starting point:

“What makes the current economic slowdown different from the one brought on by the global financial crisis is the lack of clarity about what’s happening. There’s no Lehman collapse, no housing meltdown, no sharp falloff in economic activity to signal a definitive sea change. Instead, the global economy is presenting investors with conditions few among them have ever seen before. As if war in Europe, energy shocks, and supply chain issues weren’t enough, inflation hasn’t been this high or persistent in 40 years […]. The resulting rise in interest rates has reversed a downward trend that has defined investment markets for as long as anyone can remember.” [See source.]

To summarize Bain Capital’s arguments, the main issue for PE at the moment is the uncertain outlook, but this uncertainty will not linger. The trends will be revealed in the coming months, and then, once the macroeconomic direction is clear, PE will begin to more aggressively deploy its amassed dry powder in innovation-driving investments.

Bain Capital concludes:

“[…] amid the short-term gloom, there is nothing to suggest the long-term outlook for private capital is any less positive than it was in 2021. Indeed, after attracting an astonishing $10.7 trillion in capital over the last decade, the industry may be getting even more appealing as investors continue to chafe at the limitations of the public markets.” “The industry ended 2022 with a record $3.7 trillion in dry powder, so [General Partners] will be eager to put it to work as soon as possible.” [See source.]

Lenders’ reluctance to invest in large, leveraged deals in the second half of 2022 and the beginning of 2023 also meant that deal size declined. Smaller “add-on” deals have gained share while certain sectors have continued to attract investment regardless: green energy and related projects, for one, health care for another, and, of course, artificial intelligence. See also our Blog entry Upsidedownsizing (Part Three) – Winners and Losers for more information.

On green energy, here are a few headlines:

“A Record $495 Billion Invested in Green Energy in 2022,” reports one source, citing data from BloombergNEF. “Solar investment jumped 36% year-on-year to $308 billion and is estimated to have installed 260 gigawatts of new capacity in 2022. Investment in the second-largest sector, wind, stayed roughly stable at $175 billion, held back by slow procedures for securing permission to build on land and connect to the grid, especially in Europe and North America.”

“According to the Energy Information Administration, […] combined wind and solar generation increased from 12 percent of [US] national power production in 2021 to 14 percent in 2022. Hydropower, biomass, and geothermal added another 7 percent — for a total share of 21 percent renewables last year. The figure narrowly exceeded coal’s 20 percent share of electricity generation, which fell from 23 percent in 2021.” [See source.]

Another source confirms that Europe is also well on the way in its energy transition saying, “The EU installed 41.4 gigawatts (GW) of solar in 2022, up 47% from 2021 […].”

Not surprisingly, LinkedIn reports some 88,300 executives (see Editor’s Note) citing Renewable Energy as a specialization across The US, Canada, EU, UK, and Middle East—an increase of 4% YOY, with a total of 10% having either changed jobs or filled new opportunities—more than 8,000 executive positions.

Here are a few headlines on Health Care:

In the same geography, LinkedIn reports about 10,000 new or refilled executive positions in Health Care in the past year—significant even in a huge market of almost 260,000 executives.

“PE firms announced or closed an estimated 863 deals in 2022, making last year the second-highest on record for activity in the [Health Care] sector, after 2021, according to a new report from market data firm PitchBook. PitchBook has been tracking the data since 2017.” [See source.]

Beyond the need to improve productivity and address staff shortages through automation, why were so many deals realized in Health Care? Forbes summarizes some of the major trends in this industry as follows:

“We’re seeing incredible momentum in areas such as multi-omics and molecular diagnostics, personalized care and digital health solutions that will play an increasingly important role in the future of healthcare delivery. The industry is already taking steps to maximize the potential of advanced technologies, from AI-enabled solutions to digital ecosystems.” [See source.]

And then there is artificial intelligence:

“Generative AI has taken the VC tech space by storm […] in an emerging market that’s expected to grow to more than $42 billion globally in 2023.” [See source].

There is so much hype at the moment about ChatGPT and its ilk, that we will not attempt to summarize it here. Clearly, a huge amount of investment is flowing into this area from small and large companies alike. The main issue may well be finding the talent to unleash the potential of these technologies intelligently.

Fortunately, the Economist informs us that although the tech sector has laid off about 260,000 staff (not only executives) in 2022 and 2023, this pales beside the 685,000 who lost their jobs in the sector during the 2008-2009 downturn [See source].

Also, there seems to be a voracious appetite for the skills these techies offer:

“For years unsexy industries like industrial goods have struggled to compete with the tech industry for talent. Now they are pouncing. John Deere, an American tractor-maker, has been snapping up fired tech workers to help it make smarter farm machinery. Last year the firm opened an office in Austin, a thriving tech hub in Texas. Carmakers, increasingly focused on software, are also hungry for technologists. So are banks, health insurers and retailers.

Some of the laid-off techies are helping fuel a new generation of startups.”

“Applications in January to y Combinator, a startup school in Silicon Valley, were up five-fold on the previous year. Excitement is particularly strong in the buzzy field of Chatgpt-like “generative” artificial intelligence (ai), which uses complex algorithms and oodles of data to produce everything from essays to artworks—so much so that even big tech continues to hire enthusiastically in the area.” [See source.]

LinkedIn cites only about 45,000 executives with artificial intelligence as a specialization, but this cohort has increased by 26% in the past year and another 4,600 changed jobs, so that the total executive opportunity totaled some 15,000 positions.

Opportunities in PE portfolio companies

In our last Private Money series of Blogs, we highlighted an estimated 225,000-300,000 executives active in portfolio companies. Given all we have reported above, this number is only likely to grow over time. In fact, recent research [See source] suggests that the pace of change is likely to increase in this sector. According to a new survey:

“Among PE firm respondents, 54% said they have the right leadership in place at their portfolio companies; only 53% of [portfolio company] executives believe the same…”

“Beyond leadership, 60% of PE firms and 81% of portfolio company leaders said recruitment and retention would be among their most significant challenges in the next 12 months.”

“For company leadership, the challenge of recruitment and retention ranked far above recession risk, higher interest rates and harder-to-access debt, strategy execution, and market volatility.”

All, in all, opportunities for executives in PE portfolio companies can only grow over time. The Barrett Group has been helping executives rethink and reinvent their careers now for more than 30 years, also in the PE space. [Read more.] Particularly if you feel it is time for a new industry, a new role, or a new challenge, you would be well advised to consult the industry leader in career management, recognized by Forbes as one of the best in the business of helping executives discover opportunity.

Peter Irish, CEO
The Barrett Group

Editor’s Note:

In this particular Blog entry “executives” will generally refer to the Vice President, Senior Vice President, Chief Operating Officer, Chief Financial Officer, Managing Director, Chief Executive Officer, Chief Human Resources Officer, Chief Marketing Officer, Chief Information Officer, Managing Partner, General Counsel, Head, and President titles. Unless otherwise noted, the data in this Update will largely come from LinkedIn and represents a snapshot of the market as it was at the time of the research.

Is LinkedIn truly representative? Here’s a little data: LinkedIn has more than 900 million users. (See source) It is by far the largest and most robust business database in the world, now in its 20th year. LinkedIn defines the year-over-year change (YOY Change) as the change in the number of professionals divided by the count as of last year. “Attrition” is defined as the departures in the last 12 months divided by the average headcount over the last year.