Private equity is part of the lives of most Americans — whether they know it or not
Whether you’re a stock-market investor, an employee of a private business or a customer of one of the thousands of consumer-facing companies owned by private-equity funds, private equity is part of your life.
Outside of those roughly 6,000 listed companies on the Nasdaq and the NYSE, the world of private equity is a major player in the larger universe of private companies, often owned by families or other private-equity firms. If you’re one of the roughly 19 million public employees in the U.S. working for a state or municipality, or if you work for a large learning institution, a chunk of your retirement plan’s money is invested in private-equity funds, private credit funds and other alternatives.Not unlike an exchange-traded fund or a mutual fund, a private-equity fund holds a basket of companies.
Every time a sale happens, the LPs are entitled to 80% of any profit from the sale of the company. The private-equity fund’s general partners, or GPs — made up of private-equity executives — get 20% of the profit, which is called carried interest. By the end of the life of a fund, all the companies have been bought and sold, with cash dispersed to investors and the firm.
After the global financial crisis of 2007-08, many banks spun off their private-equity units into independent firms. Others point out that the industry shows merit because it’s had a solid track record of stewardship for major pension funds and other institutional investors. By contrast, BlackRock Inc. BLK, +0.51% Chief Executive Larry Fink, who runs the largest asset manager in the world, with assets under management of $9.4 trillion, is worth about $1 billion, according to Forbes.When Mitt Romney, co-founder of large private-equity firm Bain Capital, ran for president against Barack Obama in 2008, he famously said, “I like being able to fire people.
Also read: We expect it to be removed’: Democrats’ push to close ‘carried interest loophole’ in jeopardy as Sinema seeks to block effort At last check, about 12 million people in the U.S. work for companies backed by private-equity firms, and they earn an estimated $1 trillion in wages, according to data from the American Investment Council, a trade group for private-equity firms. The entire U.S. private-equity sector accounts for about 6.5% of U.S. gross domestic product, or about $1.7 trillion, according to the AIC.
A fresher example is that of retailer Chico FAS CHS, +0.07%, which is being acquired for $1 billion by Sycamore Partners, a private-equity firm that manages a portfolio of retail brands such as Staples, Hot Topic, the Limited, Talbots, Dollar Express and Nine West. Impacted by steep debt payments and competition from retailing giants such as Walmart Inc. WMT, +0.39% and online competitors such as Amazon.com Inc. AMZN, -1.99%, Toys R Us went bankrupt, resulting in about 33,000 layoffs in 2018.
For now, private-equity firms continue to expand their reach to individuals mostly through the registered investment adviser network for moderately to extremely wealthy individuals with at least $1 million in assets outside of their primary home. But if the 20% will suffice, individual investors may buy shares of several private-equity firms with stock listings in the U.S.
Other public companies with exposure to private markets include Hamilton Lane Inc. HLNE, +0.65%, StepStone Group Inc. STEP, +0.86% and PJT Partners Inc. PJT, +0.88%. Key to whether investor interest in private equity continues will be the performance of the asset class, which has been boosted by the past era of low interest rates, which ended last year with a series of rapid rate hikes by the U.S. Federal Reserve and other central banks.
As big as public pension funds are, they only account for about $7.7 trillion of U.S. retirement assets, which totaled $35.4 trillion as of March 31, according to figures from the Investment Company Institute.
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