Class of 2020 | lirich@wharton.upenn.edu

Private equity institutions have a surprising permanence. Whereas the funds they raise are often temporary, the individuals at the helm of private equity firms have largely stayed the same. David Rubenstein, William Conway, and Daniel D’Aniello, the triumvirate that stands atop The Carlyle Group, are all above the age of 65. Steve Schwarzman of Blackstone and Henry Kravis of KKR are in the same boat--both have steered their companies for the past 3 decades. This kind of enduring leadership is both unprecedented and unique to the private equity industry. Although Apple was founded the same year as KKR (1976), the former has gone through seven chief executives; the latter none. Even the firms that employed the big four’s founders before they ascended to their current perch have all folded: Bear Stearns, Lehman Brothers, First National Bank of Chicago, and Drexel Burnham Lambert. Despite the talent that exists within PE firms, it remains to be seen if any of the big four can survive without their current bosses.

Private equity is also becoming more popular around the world. Eastern Europe has seen a 25% increase in private equity investments since 2014. New funds are being created in countries like Barbados, Namibia, and Sierra Leone. Nowadays, only half of the world’s private equity firms are even American. To someone living just twenty years ago, this proportion is unfathomably low. This isn’t due to a slow-down in the growth of American private equity firms. It only has to do with an explosion in the number of private equity firms in general. According to Preqin, in 1980, there were 24 private equity firms. In 2015, that number has grown to 6,628, of which over 600 were founded in 2015 alone. This growth exists in stark comparison to the decline of other institutions. In America, the number of banks peaked in ‘84; the number of mutual funds peaked in ‘01; companies in ‘08, and hedge funds in ‘15.

The success of private equity firms stems from their ability to ignore many of the external pressures that public companies are plagued with. Whereas a CEO of a public firm worries incessantly about public relations, the only relations that matter to the CEO of a private equity firm are investor relations. And even then, those relations can often be prioritized behind maintaining the long-term vision of a fund. Even the publicly listed private equity firms are not dependent on the same metrics used to measure other public companies. Although all of the big four have seen their share prices fall sharply over the past year, all are successfully raising new, larger funds. According to The Economist: “The unusual design of private equity makes it resistant to all but the most protracted turbulence; its record redefines resilience.” These protracted turbulences are referring to events like the tech bubble in the early 2000s and the recent slump in oil prices. The collapse of oil prices has significantly impacted The Carlyle Group’s returns, as they were heavily invested in the oil & gas industry.

Will the growth in private equity slow down? Perhaps. Perhaps not. Unlike clients of a bank or a mutual fund, who can withdraw money within a day or two, most “limited partners” (i.e. investors) of a private equity fund have limited access to their money. In fact, the standard commitment is a decade. This stability has allowed private equity firms to assemble massive operations. Although the firms themselves only employ a few thousand people each, the businesses the firms operate employ millions. In the case of KKR, the 115 businesses the firm operate employ nearly 750 000 people. This influence over the US economy has led to concerns about the accountability of these private equity firms. Many experts anticipate government regulations in the near future. Moreover, the success of the firms also serves as a double-edged sword. As more players enter the field, opportunities become more and more scarce. Future fund managers will have to deal with increased public scrutiny and competition. It may just take another Schwarzman or a Kraviz to lead private equity into the future.