Investment returns are a powerful engine driving the shift toward private capital. According to the McKinsey Global Private Market Review 2021, a pool of private equity funds from 2007 to 2017 had median annual returns of 13.3% through September 30, 2020, based on the internal rate of return (IRR) calculation that is standard for the industry. In comparison, the S&P 500 Index returned an annualized average of 8.6% in that same time frame, while the Russell 2000 Index returned 3.6%.
Of course, private and public equity investments are not interchangeable. They have significant differences in terms of liquidity and risk, and most institutional investors consider private capital a higher-risk/higher-return option than public stocks.
- The megatrend shift toward private equity ownership has contributed to the strong market for sellers.
- PE ownership has also driven more competition in the operating and service provider environment as PE-backed firms upgrade business practices.
- Non-PE-backed firms should take a proactive approach to stay competitive, and adopting PE-style practices can help.
- With an expanding private capital sector, companies also have more options than ever before to access private capital across such as private equity, private debt, venture capital, infrastructure, private equity or traditional real estate, IP/intangible assets, collective assets, special situations, and secondaries.
- There are options for minority or majority equity investments, enabling middle-market companies to tap into the value of a private equity partnership without fully divesting.
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