The last 20 years have been a period of tremendous growth for the Private Equity (PE) industry. But as it has grown in popularity, it has come at the cost of a decline in publicly traded companies, including in South Africa, says Graham Stokoe, Africa Private Capital leader at EY Africa.
Stokoe said that from its roots in the 1970s and 80s in the buyout and venture capital spaces, private capital has expanded dramatically in both scope and scale.
“Funds have gotten larger, the investor pool has broadened and the largest players have transformed themselves into fully diversified alternative asset managers, with offerings across a wide range of geographies and asset classes,” he said.
Citing Burgiss data, Stokoe said that between 1998 and 2018 the number of active buyout, real estate and credit funds grew from slightly more than 900 to more than 5,500.
Net asset values have grown even faster — more than 15-fold, from about $130 billion in 1998 to roughly $2 trillion today, he said.
“Most significantly, most current indicators point toward continued growth in both the number of funds and their net asset values (NAVs).
“Indeed, the last three years have seen record amounts of capital raised by the industry, driven by increased allocations and recycled distributions by existing investors in the space, as well as new entrants to the asset class, such as high-net-worth individuals, family offices, sovereign wealth funds and pension funds in many emerging markets.”
Stagnation in public markets
Concurrent with PE’s growth is a measure of stagnation in the public markets, said Stokoe.
“It’s become clear that the model of public ownership is increasingly falling out of favour, at least for many companies in the middle-market space and those in the more growth-oriented stages of their maturity curves.
“According to The World Bank, in the US, for example, the number of publicly listed companies is down almost 50% over the last 20 years; similar trends are evident in much of Europe.”
Stokoe said that in South Africa there are 62% fewer listings on the JSE now than at its peak number of listings.
“While the number of public companies changes from year to year and decade to decade, what we’ve witnessed is a steady decline over the last 20 years,” Stokoe said.
He noted that in addition to the rise in private equity there are other forces that play a role, with the most significant being:
- Increased M&A activity, driven by both sponsor-led leveraged buyouts (LBOs) and corporates seeking to drive growth via acquisitions;
- A dearth of IPOs — new companies are staying private longer (in the US, for example, the number of public companies has decreased 50% over the last two decades, according to research from the University of Florida).
Stokoe stressed the importance of understanding the implications of these trends so as to grasp the future of PE and its role in the capital markets.
“Changes in where companies raise capital can have important implications for investor returns and corporate growth. PE firms can benefit from a better and more holistic understanding of their investable universe,” he said.
“Entities that invest primarily in the public markets can benefit by understanding the shift toward private capital and the implications on their portfolios if they fail to adjust.”