Essentials of Private Equity
Private equity funds invest in non-publicly traded companies, ranging from startups to large private enterprises.
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INTRODUCTION TO Private Equity
Value Creation
Private equity managers have extensive value-creation capabilities, which they can use to unlock growth potential over time in the companies in which they invest. These efforts create the potential for a higher return, but investors must trade off some liquidity to pursue this “illiquidity premium,” as it is often called.
Joe Baratta, Global Head of Private Equity, discusses the evolution of private equity, the advantages of the private market, private equity’s historical outperformance, and Blackstone’s approach.
Understanding Private Equity [ 5 ]
Private equity consists of investments in privately held companies, ranging from early-stage growth companies to large enterprises across every industry and geography. Private companies are a critical part of the global economy [ 6 ] and can take a longer-term orientation than the focus on share-price fluctuations of many public companies.
Private equity investors can help these businesses grow through active engagement and value creation strategies, including reshaping leadership, operations and financials.
Historically, return generation in private equity has been attractive, [ 7 ] and is derived from earnings growth and multiple expansion by exiting at opportune moments.
Note: There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict, or guarantee, and are not necessarily indicative of, future events or results. Represents Blackstone’s view of the current market environment as of the date appearing on this material only. Additionally, investments in private equity are speculative and often include a higher degree of risk.
Investing for the Long Run
In exchange for making illiquid investments, investors seek a higher return than they might achieve holding liquid equities. [ 10 ] This offset is known as the illiquidity premium. Even with recently available perpetual funds designed for individual investors to allow for periodic redemptions, private equity remains an asset class that aims to reward long-term investments. Over time, private equity has delivered meaningful long-term outperformance with less volatility versus public markets.
Source: Cambridge Associates, as of December 31, 2023. Note: Growth of $100,000 based on cumulative returns from January 1, 2007, to December 31, 2023, in order to capture performance throughout the Global Financial Crisis. Past performance does not predict future returns. “Private Equity” is represented by the pooled returns of the blended Cambridge Private Equity Index which is comprised of buyout funds, secondary funds, and growth equity funds. “Public Equities” are represented by the Cambridge Modified Public Market Equivalent (“PME”) analysis of the MSCI ACWI Index. Comparisons of private equity performance to an index are therefore based on the difference in performance between Cambridge Private Equity Index IRR and the hypothetical PME return of the applicable public index. Hypothetical PME index performance may differ materially from the performance of such index during the same time period on account of the adjustments made for the timing of cash flows as per the PME analysis. Public Market Equivalent (“PME”) methodology replicates the date and amount of cash flows from Cambridge Global Private Equity Index capital calls or distributions in a public market index (i.e., Russell 2000, S&P 500). The hypothetical returns generated by these cash flows then track the public market index performance with the hypothetical PME NAV at the end of a given quarter used for the hypothetical PME Index IRR calculation. Comparisons of Cambridge Global Private Equity Index performance to an index is therefore based on the difference in performance between Cambridge Global Private Equity Index IRR and the hypothetical PME IRR of the applicable public index. Hypothetical PME index performance may differ materially from the performance of such index during the same time period on account of cash flow timing. Indices are provided for illustrative purposes only, and there are significant risks and limitations to relying on comparisons to an index, including the PME adjustments.
Index Comparison: The volatility and risk profile of the indices presented in this document is likely to be materially different from that of a fund. In addition, the indices employ different investment guidelines and criteria than a fund and do not employ leverage; as a result, the holdings in a fund and the liquidity of such holdings may differ significantly from the securities that comprise the indices. The indices are not subject to fees or expenses and it may not be possible to invest in the indices. A summary of the investment guidelines for the indices presented are available upon request. In the case of equity indices, performance of the indices reflects the reinvestment of dividends.
Index Definitions: Cambridge Associates US Buyout Index: This index is a horizon calculation based on data compiled from US buyout funds formed between 1986 and 2023; Cambridge Associates US Growth Equity Index: This index is a horizon calculation based on data compiled from US growth equity funds formed between 1986 and 2023; Cambridge Associates US Private Equity Index: This index is a horizon calculation based on data compiled from US buyout and growth equity funds, formed between 1986 and 2023; Cambridge Associates US Secondaries Index: This index is a horizon calculation based on data compiled from US secondary funds, formed between 1991 and 2023; MSCI ACWI: The index measures the performance of the large and mid cap segments of all country markets.
Private Equity: A Core Allocation
Private equity has traditionally been an illiquid asset class primarily accessible to institutional investors, such as pension funds and university endowments, who could accommodate the long (typically 7-10+ years) investment horizons that private equity managers need to drive valuation creation.
Institutional Investors Have Long Made PE a Core Part of their Portfolios
Note: There can be no assurance that any fund or investment will achieve its objectives or avoid substantial losses, or that alternative investments will generate higher yields than other investments. Past performance does not predict future returns. For Average Endowment, see Preqin Institutional Allocation Study 2024. For Average Family Office, see UBS Global Family Office Report 2024. For Average Individual Allocation, the mid-to-low single digit industry average alternatives allocation estimate is based on the Bain & Company, Global Private Equity Report 2023. The 3% allocation includes all alternatives, of which private equity is just one component.
Unlocking Value in Portfolio Companies
Long-term Business Transformation
Managers strive to unlock growth potential over time to take high-performing companies to the next level.
Building a High-Caliber Management Team
Managers can strengthen or reshape management teams in ways that are not possible for most public equity investors.
Synergies Across Portfolio Companies
Large-scale managers can create synergies between portfolio companies by leveraging functional expertise and networks to help improve operating performance.
The Value-Creation Toolkit Utilized by Private Equity Managers
The Value-Creation Toolkit Utilized by Private Equity Managers
CASE STUDY
Refinitiv: Value Creation at Work [ 13 ]
Refinitiv is a financial and economic data, news, analytics, and workflow solutions platform carved out from the Financial & Risk division of Thomson Reuters. Key highlights:
- Built new product offerings leveraging Blackstone’s alternatives experience and leveraged Blackstone’s relationships to accelerate sales.
- Spun off the electronic-trading subsidiary Tradeweb in a 2019 IPO valued at $18 billion, unlocking value for investors.
- Upgraded executive leadership team and streamlined organizational structure.
- Refinitiv merged with the London Stock Exchange Group in January of 2021, creating a leading global financial data and infrastructure provider.
Note: As of February 2021, which reflects data as of the date of Blackstone’s partial exit. Past performance does not predict future returns. There can be no assurance that any Blackstone fund will achieve its objectives or avoid significant losses. The investment shown above was made by an existing Blackstone fund and is provided for illustrative purposes only. This example may not be representative of all investments of a given type or of investments generally and it should not be assumed that any Blackstone fund, investment or acquisition will make comparable or equally successful investments in the future. The investment shown above was made by an existing Blackstone fund and is provided for illustrative purposes only.
Considerations Before Allocating
Ultimately, private market investing means active ownership of less liquid assets, as value creation takes time. Liquidity needs at the total portfolio level are one important consideration before allocating to private equity. In addition, manager selection may be of particular importance given the wider dispersion of returns compared to public markets. Key manager attributes include scale, staying power and a long track record.
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Read the complete Essentials of Private Equity
