With world financial markets in crisis many in the financial media are pronouncing the early death of private equity.
Take for example recent articles from the New York Times that claims, "The private-equity gravy train has jumped the tracks," adding that , "The buyout bubble has burst." The global credit crunch of summer 2007 and the cancellation of some high-profile private-equity deals have raised doubts about the sector's ability to sustain its high levels of growth.
But those claims need to be taken with a grain of salt.
According to a joint study by The Boston Consulting Group (BCG) and IESE Business School reports that this pessimism is unwarranted.
In fact, the study found that "despite recent troubles, the basic elements of the private-equity business model remain very much in place."
In other words, just the opposite of what some media is reporting.
The study's authors - Heino Meerkatt, John Rose and Michael Brigl of BCG and Heinrich Liechtenstein, M. Julia Prats and Alejandro Herrera of IESE - maintain that private equity will continue to be an important source of capital.
Furthermore, there is reason to see continued growth in the sector, as the study predicts that the credit crunch should not stifle long-term growth. Indeed, the study estimates growth of 15 percent to 20 percent each year until 2011.
Meaning if there is money available for investment. Through 2006, the private-equity sector in the United States and Europe had accumulated nearly $300 billion in uninvested capital. This committed capital will be a powerful impetus for future deals.
Also, new capital continues to flow into private equity.
In a recent Citigroup survey, 50 pension managers from the United States and Europe reported that they intend to raise their allocation in "alternative" investments, such as private equity and hedge funds, from 14 percent to nearly 20 percent by 2010.
Still not convinced?
There are also signs of new categories of investors showing up on the horizon.
There have been several reports lately of government-owned sovereign wealth funds (SWFs) having recently discovered private equity. In addition to investing in private-equity funds, they are taking ownership stakes in private-equity firms.
In May 2007, the new $200 billion SWF of the government of China announced that it was acquiring a 10 percent stake in The Blackstone Group for $3 billion.
All to say that new money continues to flow into the sector, both from traditional pension funds and from SWFs looking for higher returns.
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On a risk-adjusted basis, private equity does not outperform the public capital markets. Nevertheless, it remains an extremely attractive asset class for investors. The reason: there are indications that the best private-equity firms consistently "beat the fade."
This means they avoid reverting to average returns, which, over time, afflict the vast majority of investment opportunities. So, some private-equity firms do have a strong likelihood of outperforming the market over time - something rarely witnessed in other asset classes, such as mutual funds or individual public companies.
Heino Meerkatt, the global leader of BCG's private-equity practice, describes it this way: "Over time, the value-creation performance of the vast majority of public companies fades towards the market average. Not so with private equity. We found that the performance of the top-quartile funds barely faded over the time period we studied. This suggests that the best private-equity firms consistently outperform both public companies and their private-equity competitors - and, thus, represent an advantaged investment vehicle."
To confirm this, the study
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