PE is a rebranding of the 1980s-era leveraged buyout, or LBO, industry. PE pools money to invest in undervalued or underperforming private firms, or listed firms, only to take them private. PE firms take a controlling stake in an operating business with the hope of increasing their value over time by whipping them into shape, and a few years later selling them for a lot more than what they were originally purchased for. A key part of their operating method is to cut costs, fire a lot of workers, strip the pensions and healthcare benefits of remaining staffers, and prepare to sell the acquired firm in five to seven years.
Just days after the US Federal Reserve raised the Fed Funds rate to 5.5% from nearly zero 16 months ago, a friend mentioned that the wealth management firm that handles his retirement account was nudging him towards buying into a private equity or PE fund. As interest rates are likely to stay higher for longer, PE firms are scrambling for new sources of funds. Pension funds and retail investors are key targets.
PE already has more money than you can imagine. Bain & Co, a consulting firm, estimates that PE firms are currently sitting on US$1.1 trillion ($1.48 trillion) of dry powder and US$2.8 trillion in un-exited assets, more than four times the money they had at the height of the Global Financial Crisis 15 years ago. There are more than 18,000 PE funds in the US alone, a 60% increase over the past five years. PE now employs nearly 11 million people or over 9% of America’s working population.
