Private equity may not have been around long (about 30 years, give or take), but it’s come a long way. Industry leaders like KKR have built themselves up from fledgling companies requesting investments to big name players setting the standards. And with private equity looking stronger than ever, what will the future hold?
The first private equity firms started popping up in the mid-1940s and 50s with the American Research and Development Corporation (ARDC) and J.H. Whitney & Co. These are the sorts of companies whose methods are still standard today in industry leaders like Henry Kravis, co-founder of KKR, and Donald J. Goegel, chairman and chief executive of Clayton Dubilier & Rice.
While the specific term “private equity” may be relatively new, it’s those methods that are far more timeless. Venture capital, growth capital, distressed situations, and leveraged buyouts can be seen as far back as the early British North American colonies, which were often founded by joint-stock companies like the Massachusetts Bay Company. In fact, the folks who provided the capital for settlers were called “adventurers,” a term that still echoes in the modern “venture capitalist.”
But it was the early railroads that really solidified the concepts and practices that would become private equity as we know it today. Economics in the 1890s was troubled, to say the least, and railroads both grew and failed rapidly in inexperienced hands. That’s where the earliest private equity investors stepped in. When Union Pacific collapsed due to corrupt and inefficient management, Kuuhn, Loeb, E.H. Harriman took over, turning it into one of the greatest cash cows in American history.
Today, private equity is looking up despite similarly troubled economic situations. In 2015, for example, fund managers were recorded as having distributed a record-breaking $523 billion to investors—10% above the previous high of $477 billion set in 2014. Experts are noting that low interest rates and micro focus have private equity assets set to rise up to 20% this year. New and varied types of investments such as shadow capital (investments outside of traditional fund structures) are also on the rise, and managers are likely to have even more hands-on roles.
Moving forward, the globalization trend is also likely to affect how private equity works. Anchor economies like Brazil and China are fertile ground for new investments, and while the full effects of Brexit remain to be seen, Europe has opportunities, too. In fact, according to Accel Partners’s Fred Destin, “Europe offers the prospect of 3x returns for the first time.”
But then, modern American commerce has always had its eye on global investments–Europe, Asia, and Latin America have all been areas of interest for American private equity investors from as early as the 1990s.
The future, then, is likely to hold onto some of the quintessential elements of historical private equity–risk, reward, and intelligent investments–as well as new opportunities for globalization and different investments, particularly in technology. The more the world expands and changes, the more things stay the same.