Surge In Private Equity Deals Now On Cusp Of Breaking Into ETFs
- by Forbes
- Aug 01, 2024
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CAPE CANAVERAL, FLORIDA - OCTOBER 13: In this handout provided by NASA, a SpaceX Falcon Heavy rocket
... [+] with the Psyche spacecraft onboard is launched from Launch Complex 39A, October 13, 2023 at NASA's Kennedy Space Center in Cape Canaveral, Florida. NASA's Psyche spacecraft will travel to a metal-rich asteroid by the same name orbiting the Sun between Mars and Jupiter to study its composition. The spacecraft also carries the agency's Deep Space Optical Communications technology demonstration, which will test laser communications beyond the Moon. (Photo by Aubrey Gemignani/NASA via Getty Images)
NASA via Getty Images
Private equity has been on a tear for the past few years. While Mega Caps have soared and Small Caps have languished, 100’s of companies, such as SpaceX, Xai, Anthropic, Stripe, etc. have quietly been raising billions of dollars each year, mostly from Institutional and High Net Worth (HNW) investors.
Notably, retail investors have been absent from the party. Net worth restrictions, limiting participation to accredited investors, keep small-time investors on the periphery, but even wealthy investors often eschew private equity ownership. Long holding periods, high transaction costs, sparse information, and large minimum commitments prevent many would-be investors from engaging in these transactions. Yet money continues to pour in. According to Pitchbook, close to $300B entered the private equity (PE) market in just Q1, 2024, representing 53% of all capital raised. This amount comes despite the difficult exit environment (weak IPOs) and slow distributions.
Clearly, many seasoned investors see something they like. The estimated PE Assets Under Management (AUM) now exceeds $5.5 trillion (Pitchbook) with more coming in each year. This investment category has experienced substantial growth in AUM which has more than doubled over the past decade. Much of the growth derives from insatiable investor appetite that seeks higher returns and diversification.
Currently, there are more than 1,100 private companies that trade in the secondary market with a capitalization greater than $1B. Further, more than 100 private companies trade in the secondary market with a market capitalization greater than $10B. This latter value reflects the demarcation for “Large Cap”, placing these 100 companies in the highest investment echelon.
But why the surge in private equity? What makes this investment category so special? Data from the CAIA provides a compelling argument that private equity performance over time substantially outperforms public equity. In the 23 years from June 2000 to June 2023, state pension private equity performance provided an 11% annual return compared to 6.2% for public stocks. Though it may be unfair to assume that every 20+ year performance stream will demonstrate a near doubling of investment performance of PE over public equity, the 4.8% annual differential can certainly justify the investor demand.
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