Russel Steenberg, Managing Director and Global Head of BlackRock Private Equity Partners, gave an interesting view on the future of the private equity industry last week in an interview by PrivCap. The money quote goes as follows:
“Steenberg: How many stocks do you think there are out there in the world that you can invest in today?
PrivCap interviewer: Globally? I don’t know.
Steenberg: The number is someplace in the 30,000 to 40,000 range my experts at BlackRock tell me. What’s the capitalizations of the world’s public stock markets?
PrivCap interviewer: I can’t guess.
Steenberg: It’s in the trillions of dollars. The amount of money available in private equity funds, even if you count the leverage which people like to add, is less than 1% of the capital available to chase these 40,000 stocks. I’ll put it to you, there’s comparatively much more money chasing public securities in the world today than there is in the private equity world because the number of private companies that exist in the world today that would be investable goes way beyond 40,000. So we have only scratched the surface on private equity.
[…] The biggest barrier to entry to the private equity business always has been and still is the ability of a group to raise their first fund.”
Beyond this bold “back of the envelope” estimate, there are a number of underlying trends supporting the argument that the late-stage PE industry is set for long-term growth, both in the pre-IPO and post-IPO segments.
- Post-IPO growth
Public-to-private buyouts will increasingly represent a much needed vehicle for publicly-listed companies to get out of difficult situations when drastic decisions/pivoting are required. The truth is public companies are not well structured and incentivised to implement such significant/brutal pivot because of the enormous pressure they receive from the stock market; shareholders expect stable and predictable financial results on a quarterly basis! For instance, have a look at what happened last week to Apple’s market valuation (despite record-breaking earnings!) when its latest results turned out to be below analysts’ forecasts. As a consequence, executives of public companies are not under the right incentives and most adopt the unfortunate “boiling frog” tactic when faced with tough challenges, instead of implementing a new course of actions. Executives in PE-backed companies, on the other hand, are free (and in fact incentivised) to make these difficult changes. Going forward, given the ever more challenging and competitive business environment companies operate in you can bet there is not going to be a shortage of public companies finding themselves in tough situations. Consider the recent demise of HMV in the UK: would this bankruptcy have occurred, had the company undergone a strategic U-turn, supported by a buyout, 2-3 years ago when the signs of imminent failure were already obvious?
- Pre-IPO growth
Ever-larger injections of private investment are required before growth companies can have a shot at an IPO, in part because the Sarbanes-Oaxley regulation in the US has made the IPO process more costly and more difficult to pull through. The resulting need for bigger pre-IPO deals has fuelled the creation of “mega-VCs / secondary market funds” whose investment model sits somewhere in between VC and Private Equity funds. Digital Sky Technologies (DST) is a prime example, having pioneered this type of mega-deals by investing $200 million in Facebook in May 2009 and then launching in July 2009 a tender offer of $100 million to Facebook employees.
Given these two trends I expect to see a continuous rise in the global amount of assets under the management in private equity funds focused on late-stage/mature companies.
[This article will shortly be followed by a second part with a focus on early-stage / seed investment]