Private equity has recovered to pre-pandemic levels following a superb 2021.
Private equity firms have made a stellar recovery from the global pandemic. According to PricewaterhouseCoopers, 2021 deal volume surged 48% versus the same period of 2020. And in just four quarters, private equity activity returned to pre-pandemic levels. The tail winds of low interest rates, socially conscious investing and demand for alternative assets have created an all-out boom in the industry. However, there are some concerns that private equity could become a victim of its own success. Given the high historical rates of return, competition is quickly entering the field. Plus, other types of deals, such as special purpose acquisition companies, or SPACs, have driven up prices for assets that would traditionally be in private equity’s wheelhouse. Regardless, it’s been a great run for the industry in recent years. So here’s a look at 10 of the largest private equity firms today, along with a brief rundown of what private equity is and how it makes its money.
How private equity works.
Private equity companies generally obtain capital from institutions such as pensions, endowments and sovereign wealth funds. They use this capital to invest in private companies. Often, private equity will buy a business that is underperforming and implement changes to streamline operations and improve profitability. Over time, as the business’s financial metrics improve, the private equity firm can list the company via an initial public offering or otherwise monetize the asset to deliver returns for its investors. Private equity firms generally earn a management fee based on the amount of total assets under management, or AUM, along with realizing gains when the value of portfolio companies increases. It’s a lucrative business, and these 10 firms have made it to the top of Private Equity International’s list of the largest players in the industry, ranked by money raised over the last five years. Here are the top 10 firms on the PEI 300 list.
Blackstone Inc. (ticker: BX)
Blackstone is the private equity leader. That’s not surprising, given the tremendous success of its stock. Blackstone launched its IPO in 2007. That was unfortunate timing; shares would soon lose most of their value in the great financial crisis. Since 2009, however, the stock has jumped from about $5 to almost $130 today, giving public investors a taste of the riches in private equity. The firm converted from a publicly traded partnership to a C corporation in 2019 and has developed a broad line of business. At the end of 2021, it managed $279 billion in real estate, $261 billion in private equity, $81 billion in hedge funds, and $258 billion in credit and insurance. In its latest quarterly report, Blackstone reported that distributable earnings rose 55%, to $2.3 billion, in the most recent quarter and rose 85%, to $6.2 billion, for 2021.
KKR & Co. Inc. (KKR)
KKR is another storied private equity shop. The firm was founded in 1976 and operated throughout the mania that was the 1980s leveraged-buyout boom. KKR became famous for its involvement in the acquisition of packaged food and tobacco company RJR Nabisco in what was then the largest buyout in history. KKR has evolved with the times. It listed its stock to the public in 2010, and shares have done phenomenally well, with the price up almost 600% since listing. KKR is involved in all sorts of industries and situations. However, one recent deal highlights the firm’s broad scope: The company just bought a chunk of R&B singer John Legend’s songwriting catalog, giving it exposure to the burgeoning revenues coming from music streaming services such as Spotify Technology SA (SPOT). Through deals like this, private equity investors get access to assets that are otherwise hard to obtain.
CVC Capital Partners
CVC Capital Partners is a British private equity firm. It was originally founded as part of Citigroup Inc.’s (C) investment operations. The European piece of this would eventually become what is CVC today. The firm now has dozens of investments across a vast array of industries, including payment processing, health care, cybersecurity, building materials, toll roads and restaurants. CVC is notable for its investments in various sports leagues. The firm was a longtime investor in Formula One Group and has current investments in other sports such as rugby and volleyball. This sort of diversification across niches can be hard to achieve through publicly traded markets, giving private equity investors the benefit of owning uncorrelated assets.
Carlyle Group Inc. (CG)
Carlyle Group is another of the top publicly traded private equity shops. Shares listed on the Nasdaq in 2012. While performance had been uneven historically, Carlyle has found great success in the economic recovery of the past year-plus, with shares more than doubling since March 2020 lows. The company has long developed a truly global reach, with operations spanning 26 offices on five continents. Carlyle has topped the Private Equity International list in prior years. While the firm has slid in the rankings, it remains formidable, with $293 billion of assets. And given the firm’s strong recovery and improving share price over the past year, Carlyle may be back on the upswing for both its institutional investors and public shareholders.
Thoma Bravo
Thoma Bravo is one of the firms that has been moving up this list recently. It has had tremendous success with investments in the software and technology industries. Thoma Bravo prides itself on its original “buy and build” strategy of taking ownership of and then expanding technology businesses in fast-growing parts of the economy. Traditional private equity works primarily due to leverage; even a slow-moving asset can deliver strong returns with sufficient borrowed funds. However, private equity can reach another level when it combines leverage with high growth. The rise of things such as SPACs and fund managers like Ark Invest have been great for Thoma Bravo, as well as those have created a deep liquidity pool into which Thoma Bravo can sell its investments as they mature. With the market for speculative technology shares now in a downturn, however, time will tell how Thoma Bravo adapts.
EQT
EQT is one of Europe’s largest investment firms. Founded in 1994, the company managed more than $82 billion of capital as of July 2021. EQT’s portfolio features a heavy concentration of companies in continental European countries, though it is involved in North America and other regions, as well. EQT made a big splash in 2019 with its acquisition of then-publicly traded Zayo Group, which offers communications and bandwidth services across 133,000 route miles in North America and Western Europe. At more than $14 billion, the Zayo acquisition was one of the largest ones in recent memory, and it should be poised for long-term structural growth as data usage continues to surge. EQT is publicly traded, but shares are listed on the Swedish exchange, making it less practical for many American investors to own.
Vista Equity Partners
Vista Equity Partners is another firm that has developed strong domain expertise in the technology industry. It is headquartered in Austin, Texas, which has become an emerging hub for software companies. Vista invests primarily in this sort of growth firm; its past investments have been in areas such as customer relationship management software, online events management, digital security and insurance software. Vista gained a great deal of prominence in 2018, when it successfully navigated the sale of its stake in Marketo, the leader in market automation software. Vista ultimately sold Marketo to Adobe Inc. (ADBE) for $4.75 billion. As with Thoma Bravo, Vista will have to navigate a choppier sea in 2022 given the recent decline in valuations for many smaller growth companies.
TPG
TPG took a bit of a different route than many other private equity firms. It was founded in 1992 and rose from beginnings as a family office. It didn’t waste time in making a big splash, however: In 1993, it took over Continental Airlines. The firm has grown and prospered since then. It has focused on entrepreneurship and the West Coast. This gives it a different perspective than many private equity shops that buy large, mature businesses and try to optimize them. TPG’s willingness to take a chance on younger firms in emerging fields such as biotechnology has led to some tremendous success. It has portfolio investments in Airbnb Inc. (ABNB), fintech leader Acorns and Vice Media, among other unique properties. TPG was also an early investor in Uber Technologies Inc. (UBER).
Warburg Pincus
Warburg is one of the oldest firms in private equity. It traces its roots to 1939, when Eric Warburg founded the company in New York. In 1966, it joined forces with another shop and became the Warburg Pincus that operates today. The firm’s president is Timothy Geithner, who served as Treasury secretary during the great financial crisis. Having people like Geithner involved ensures that Warburg Pincus always has access to a wide range of compelling deals. The firm has investments across all sectors and is active worldwide, even holding numerous portfolio companies in various emerging markets such as India.
Neuberger Berman Private Markets
Neuberger Berman is a privately owned asset management firm. It has operations spanning private equity, public equities, hedge funds and fixed income, among others. Neuberger Berman had an unfortunate turn in 2003, when Lehman Brothers acquired the company. Lehman would ultimately go under in 2008, and Neuberger Berman was put up for auction. However, this allowed employees to buy the company, and it has prospered under its employee-owned structure. Intriguingly, all of the company’s deferred cash compensation for employees is tied to how the company’s investments fare. This gives Neuberger Berman unique alignment in an industry that has a reputation of making big bets with other people’s money. While being owned by Lehman might have sunk a lesser firm, it seems Neuberger Berman is poised to succeed for many years to come.
Top 10 largest private equity firms in the world:
— Blackstone Inc. (BX)
— KKR & Co. Inc. (KKR)
— CVC Capital Partners
— Carlyle Group Inc. (CG)
— Thoma Bravo
— EQT
— Vista Equity Partners TPG
— Warburg Pincus
— Neuberger Berman Private Markets
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The Top 10 Largest Private Equity Firms in the World originally appeared on usnews.com
Update 01/31/22: This story was published at an earlier date and has been updated with new information.
