Key Highlights
- Private equity firms face a scaling challenge due to reduced fundraising and increasing competition.
- The traditional sources of capital for private equity are pulling back, necessitating new funding strategies.
- Individual investors with investable assets could become a major source of funds for large deals.
- The U.S. market shows that the number of publicly-listed companies has halved since the mid-1990s, leading to larger buyout sizes.
Private Equity’s Scaling Challenge: The M&A Market Revives
The private equity sector is currently facing a significant challenge in scaling its operations. This issue arises from two primary factors: the leaner M&A (mergers and acquisitions) season that has starved the industry of cash, and the prolonged period required to recoup investments, now over six years on average.
According to Reuters Breakingviews, Blackstone Group and TPG are reportedly close to announcing a buyout deal for diagnostics company Hologic, which could value at up to $16 billion. This potential transaction is indicative of the scale required in today’s M&A market, where traditional funding sources like pension funds and endowments have reduced their involvement due to longer timelines and uncertain returns.
Traditional Funding Sources are Pulling Back
The shift away from traditional funding sources has pushed private equity firms to explore new avenues for capital. As the number of publicly-listed companies in the U.S. has halved since the mid-1990s, the average size of buyouts has doubled over the past decade, according to Preqin data. This trend underscores the increasing competition and difficulty in securing deals.
Additionally, President Donald Trump’s executive order allows $13 trillion in employer-sponsored defined-contribution plans to invest in private assets, opening up a potential new pool of capital for private equity firms. Blackstone has already responded by setting up a team to tap into retirement savers, signaling the industry’s willingness to adapt to changing funding dynamics.
Individual Investors: The Untapped Resource
One promising avenue for private equity firms is tapping into individual investors with investable assets of up to $5 million. According to UBS, these “everyday” millionaires collectively hold over $107 trillion globally. They have already begun pouring their funds into retail-focused mega-funds such as Blackstone’s real estate-focused BREIT and private equity vehicle BXPE.
Bain estimates that these individual investors could account for a quarter of the industry’s asset growth over the next decade, given the open-ended nature of many of these funds. For instance, BXPE has already amassed more than $400 billion in assets since its inception, indicating significant potential from this source.
Conclusion
The Future of Private Equity Fundraising
The private equity sector is navigating a complex landscape where traditional funding sources are diminishing while the demand for capital remains high. The entry of individual investors could provide a much-needed boost to the industry’s ability to fund large deals and continue its growth trajectory.
As private equity firms adapt to these changing dynamics, they will likely see an increasing role for retail investment vehicles in their fundraising strategies. This shift not only addresses the current scaling challenge but also positions the sector for long-term success by broadening its investor base.
