Private Equity

The private equity (PE) industry is constantly changing as a result of bear and bull markets, government legislation, business trends, globalization, and many other factors. Another major trend is the increasing specialization of firms. “The proliferation of sector-focused funds continues and we don’t expect that to change,” says Andrea Auerbach, global head of private investments at Cambridge Associates and co-author of the Declaring a Major report. “The industry is over 30 years old now and continues to evolve towards specialization. Our data shows firms with sector specialization have a competitive advantage.” A second trend is the increasing use of data analytics, artificial intelligence, and blockchain technology (which can be defined as a distributed ledger database that maintain a continuously-growing list of financial records that cannot be altered) to improve efficiency, better ensure the accuracy of data, and solve other problems both in-house and at portfolio companies. In 2019, 15 percent of private equity managers reported using artificial intelligence to support their investment process, according to the professional services firm EY. This was an increase of 10 percent from 2018. Thirty-four percent reported that they did not use AI, but expected to do so in the future (a 13 percent increase from 2018). “Increasingly, firms are using data, artificial intelligence, machine learning and automation to find companies, conduct due diligence, underwrite risk more comfortably, and do it faster,” according to Bain & Company. “Firms that aren’t moving in this direction risk being left behind.” Another trend is the increasing focus on environmental, social, and governance investing (ESG) investment vehicles. “The largest percentage of money managers cited client demand as their top motivation for pursuing ESG incorporation,” according to U.S. SIF, “while the largest number of institutional investors cited fulfilling mission and pursuing social benefit as their top motivations.” From 2015 to early 2020, capital raised by ESG funds increased 154 percent to $28 billion, according to Bain & Co. Finally, large PE firms—such as The Carlyle Group and Blackstone—are launching buyout funds that have a longer holding period than the traditional three to five years. These funds have expected holding periods of 10 to 15 years. “Such patience…presents an opportunity to generate higher returns on committed capital over the long haul,” according to Forbes. These are only a few of the trends and developments that will shape the future of the industry.