Global Private Equity Outlook

Industry Overview and Market Dynamics

• 2016 was a peak year for private equity, with firms receiving roughly $625 billion in capital, the highest level since the 2007-2008 cycle.
• Total assets under management (AUM) in the private equity sector have grown to approximately $4.7 trillion.
• The number of private equity firms is at an all-time high, and "dry powder" (uncalled capital) remains at record levels, though potentially less impactful relative to current deal velocity.
• Asset prices are approaching historical all-time highs, suggesting a valuation cycle rather than an economic downturn in the near term.
• Industry participants now prefer the term "alternative asset class" over "private equity," as the capital is no longer strictly private nor exclusively equity-based.

Global Context: Populism, Protectionism, and Emerging Markets

• Bruce Flatt (Brookfield) noted that $25 billion of capital was deployed in the last 18 months, with a heavy concentration in emerging markets due to local opportunities.
• Populism is identified as a risk factor in emerging markets (e.g., Brazil's Lava Jato scandal), potentially deterring infrastructure investment if citizens distrust government management.
• Panelists agreed that populism often evolves into protectionism, which could limit the global trade flows and competitive advantages of multinational portfolio companies.
• David Rubenstein (Carlyle) argued that private equity's influence on job creation has mitigated political backlash, shifting the narrative from "evil" to "value creator."
• Jonathan Nelson (Providence) disputed the attractiveness of emerging markets as a category, citing an inverse correlation between GDP growth and return on equity for dollar-based investors due to inflation and currency devaluation.
• Rubenstein countered that while average emerging market returns may match developed markets, the risk is higher, but top-quartile funds with local operating teams can exploit currency discounts and inefficiencies.
• John Connaughton (Bain) emphasized that the term "emerging market" is outdated, as economies like China, India, and Brazil now represent major global players rather than small developing nations.
• The consensus is that private equity in emerging markets is most effective as an operating play (adding value to businesses) rather than a macro bet on currency or GDP.

United States Market: Regulatory Uncertainty and Infrastructure

• Investors expressed that long-term investment decisions (5-10 year horizons) are not significantly disrupted by short-term political uncertainty or legislative changes like healthcare reform or tax law shifts.
• Healthcare was identified as a resilient sector driven by secular demographics (10,000 baby boomers turning 65 daily) rather than policy specifics.
• Bruce Flatt predicts the U.S. infrastructure sector will see significant growth, potentially financing assets via consumer pricing rather than government balance sheets, citing successful models in Australia, the U.K., Brazil, and Colombia.
• Panelists agreed that infrastructure investment is broadly popular across political lines, with the primary challenge being financing structures rather than demand.
• Private equity returns in infrastructure are expected to range from single digits to double digits depending on the asset type, with U.S. infrastructure offering lower risk compared to emerging markets.

Diversity, ESG, and Industry Narrative

• The industry has made tangible progress in Diversity, Equity, and Inclusion (DEI) and Environmental, Social, and Governance (ESG) initiatives over the last decade, moving away from its previously male-dominated, reputationally challenged image.
• Panelists noted that the industry has had to evolve its narrative to explain that job reductions often occur in the first two years, followed by significant growth over a five-year period.
• Private equity is framed as critical for meeting the obligations of underfunded public and private pension funds, historically delivering returns 600 to 800 basis points above public market indexes.
• Net internal rates of return (IRR) have declined from ~20% 15 years ago to roughly 14-15% currently, yet remain attractive relative to fixed income and public equities.
• Industry leaders argue that the narrative of "flipping assets" is less important than the long-term operational value created, such as managing essential services (e.g., water infrastructure serving 17 million people).

Future Trends and Market Disruption

• The industry is projected to become more global, with increased capital from sovereign wealth funds (SWFs) and retail investors entering through 401(k) and IRA accounts.
• Sovereign wealth funds and Canadian pension plans are increasingly interested in direct investments ("the Canadian model"), though panelists believe the 15-year timeline required to build effective teams remains a barrier to them replacing private equity firms.
• Family offices are identified as a rising competitive threat due to the accumulation of wealth by entrepreneurs and their willingness to hold assets long-term without external fundraising cycles.
• Hedge funds and major financial institutions (banks) have largely receded as threats to private equity, with banks shrinking their private equity platforms due to regulation and talent attraction issues.
• Scalability, global reach, and the ability to operate portfolio companies (rather than just financial arbitrage) are identified as the primary differentiators for future success.
• Deal structures have shifted from high leverage (e.g., 95% debt in 1989) to lower leverage (approx. 60% debt/40% equity), reducing dependence on macroeconomic factors and increasing reliance on operational value creation.
• The industry is expected to remain dominated by the Americas, which currently account for nearly 100% of large private equity firms despite representing only 18% of global GDP.

Operating Models and Capital Structures

• Panelists highlighted four distinct operating models:
  • Carlyle: Private partnership focused on maximizing upside for partners and future generations, avoiding public listing to retain control.
  • Providence: Hybrid model using permanent capital to build specific business units (e.g., credit) and balance sheet investments, choosing privacy for strategic reasons.
  • Bain: Traditional private fund model evolving into deeper vertical expertise and strategic acquisition capabilities.
  • Brookfield: Publicly traded entity with four distinct listed perpetual vehicles (real estate, infrastructure, renewable power, private equity) that co-invest alongside private funds.
• There is no consensus on a single "correct" model; firms have evolved organically based on talent, strategy, and market needs over 20-30 years.
• Talent management has shifted from pure investment banking skills to requiring entrepreneurial instincts and operational expertise, with firms maintaining flat structures to preserve decision-making agility.
• The average partner tenure is roughly 15 years, driven by the empowerment to make impact and the long-term nature of the business.