The growth of the venture capital and private equity market is accelerating. It benefited from the downside protection by central banks while offering the most exclusive access to a much higher growth potential.
Which asset class is collecting even more money than stock markets and crypto markets? No doubt private equity wins the race. According to the report by the consulting firm Bain & Company with the title «The Private Equity Market in 2020: Escape from the Abyss», the industry raised several trillion dollars in capital over the past five years.
The acceleration in funds raised over five years has been impressive. In 2020, global private equity fund-raising reached 989 billion dollars, which was close to 2019's record of 1,09 trillion dollars, the Bain study says. As of 2020, the industry managed 4,4 trillion dollars. But the expansion over the next five years could be even more spectacular. According to Preqin, the assets managed in private equity and venture capital could more than double, to top the 9 trillion dollar mark in 2025 :
Technology will keep driving the bulk of investments in this asset class. In the last five years, major money flows were focused on venture capital in the artificial intelligence space. The value of venture capital deals in this area increased at a compound annual growth rate (CAGR) of 40% between 2016 and 2020, according to GlobalData. «Some of the notable VC deals announced during 2020 included 1,9 billion dollars secured by SpaceX and 1,7 billion dollars secured by Manbang Group», says the report.
Obviously, the past decade's golden era of private equity fund-raising is far from over, and Covid-19 won’t stop it.
Of course, once again, this trend was clearly allowed by central bank intervention, which in 2020 «prevented the level of portfolio company distress we saw during the 2008 financial crisis», says the Bain report. Central bank asset purchases provided a floor to credit markets that is effectively the «Fed put» at work.
SPACs or blank-check listing vehicles, which added another 83 billion dollars to the total raised in 2020, were another major booster for private equity portfolios, which often stumble over IPO uncertainties. Special purpose acquisition companies made the market more liquid to private equity investors, as private equity firms used those vehicles to get queue-jumping exit routes.
The exceptional performance granted by private equity makes it one of the favorite markets for institutions seeking «alpha», or diversified returns that compensate for the low returns of high-quality bonds. And the outlook is shiny: as stock valuations get richer and richer, many institutions are considering an increase of their allocation to private equity this year.
But investors are getting increasingly picky about the funds in which they invest, according to the alternative investments website Opalesque. Large, well-established funds were favored in 2020. The bigger funds that launched have quickly displayed the «sold out» banner. Vehicles seeking 5 billion dollars or more in assets closed within six months, and 18% above their initial target, according to Opalesque. «CVC, for example, raised 24 billion dollars for its Capital Partners Fund VIII in five months and beat its initial target by 22%.» A fund like Symphony Technology, based in the US, even closed its 2 billion dollar fund in less than six months, and was 33% above target. Another fund with a focus on France, Montefiore Investment, raised 850 million Euro in three months.
With big money comes privacy and exclusivity. For many years now, high net worth individuals (HNWIs) have been favoring private fund structures over standard private equity funds. These private structures, which take the shape of a company or a limited partnership structure, are mostly used by wealthy families and family offices, according to International Adviser.
These vehicles are particularly fit for co-investment «club deals», in which a few families participate jointly in the same venture. That way, those investors can share the structure’s costs instead of each creating their own. Either those investors already knew each other and decided to set up the private fund together, or the fund manager of the structure is the one connecting them. HNWIs get access this way to very exclusive opportunities, which are off-catalogue, or difficult to access for the ordinary investor. Typically based in the Channel Islands, Singapore and the Cayman Islands, private funds also offer greater tax benefits than more standard structures.
Private equity is only getting more popular among big-ticket investors because it combines the best of two worlds: while taking advantage of central bank downside protection and 0% interest rates, it can offer much higher growth potential and the most privileged and exclusive access to some unknown jewels, together with tax benefits and loser regulation and scrutiny than the boring listed world.