Tuesday, March 5, 2024

Late in cycle, private equity pros stay bullish

By Mike MacMillan

About 250 private-equity professionals gathered last week for the 12th annual Alternative Investments Conference, hosted by the Institute for Private Capital at UNC Chapel Hill’s Kenan-Flagler Business School and the student-led private-equity club. This year’s theme: “Positioning portfolios for the late-stage cycle environment.”

Among the topics discussed at the packed event were the “growing importance of private capital” and the “evolution of alternative asset managers.”  Featured speakers included Lauren Dillard, head of investment solutions at The Carlyle Group, and Brad Coleman, chairman of Citibank’s global asset managers group.

“As we get closer to what looks like a cyclical peak, investors are seeking more defensive investment opportunities,” said Greg Brown, a UNC professor who is research director at the institute, “We thought that would be a great topic to explore in this year’s conference.”

Conference speakers agreed that most markets are late in the economic cycle, though about three-quarters of the attendees said that the bull market had another two years to run, based on an audience vote. The speakers, and no doubt the audience, were unsurprisingly bullish on private equity and no wonder: PE firms managed some $5.8 trillion in capital in 2017, up from $800 billion in 2000, with about $780 billion in new money raised in 2018, down slightly from the year before. About $2 trillion in “dry powder” is sitting on the sidelines waiting to be invested.

Private equity-backed companies now significantly outnumber companies listed in the public stock market. In 2006, there were about 4,000 U.S. PE-backed companies, according to McKinsey. By 2017, the number was about 8,000.  Over that period, the number of U.S. publicly-traded firms declined from 5,100 to 4,300.

Still, the market capitalization of public companies remains significantly larger than private equity assets, according to Carlyle’s Dillard.  As of the first quarter of 2018, the five largest companies listed (Apple, Amazon, Microsoft, Alphabet [Google], and Berkshire Hathaway) had a combined market cap of about $3.4 trillion. Meanwhile, U.S. private equity assets under management totaled $3.3 trillion.

While the pool of private capital is much smaller than the public markets for both debt and equity, it’s growing faster, speakers said. This was generally held to be a good thing.  While the conference was decidedly upbeat, there are some concerns among industry watchers that all this money will lead PE firms to overpay for assets, bidding up prices and depressing returns.

That has certainly been the history. Post financial crisis, the industry was a lot smaller and at least a little less confident. Still, attendees argued against trying to time the market, pointing to data indicating that private equity has generally outperformed the broad equity market averages over the long haul.  In the 20-year period ending September 30, 2018, U.S. private equity posted average annual returns of 12.1% compared to 7.4% for the S&P 500, according to Cambridge Associates.

Mike MacMillan is a veteran financial services industry publicist and communications strategist who lives in Chapel Hill.

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