Private equity firms vary in size, strategy, and many other important areas. While there are hundreds (or more) of private equity firms across the world, the term “private equity” most often conjures images of the largest and most well-known players – for example KKR, Blackstone, and Apollo, among others. Many of these firms have flagship private equity funds with over $20 billion in committed capital. Blackstone’s BCP VIII, the largest private equity fund ever raised, has $26 billion of investor commitments. These firms have set themselves apart for a number of reasons beyond their daunting size. This includes operational capabilities, corporate relationships, talent and compensation, and deal flexibility.
On the operational front, most large private equity firms now employ armies of in-house management consultants typically working in an area called “portfolio operations”. This generally refers to operating professionals and consultants with extensive expertise in specific industry verticals. These teams work hand-in-hand with private equity deal teams throughout the life cycle of an investment process. This begins with due diligence before the acquisition, helping the deal team to refine operating projections including revenue and cost-cutting opportunities. During the investment period, these executives work with portfolio companies on a range of value-creating initiatives that may include workstreams such as M&A integration, pricing and distribution strategy, and procurement optimization. Whereas smaller funds may outsource some of this work to external consultants, the largest funds’ in-house operational capabilities allow for the more extensive and continuous support of their portfolio companies.
In a similar vein, the largest private equity funds also have extensive corporate relationships that can provide them with differentiated access and operating experience, and this can manifest in several important forms. Effectively all of the large firms have a stable of “operating partners”, who are typically former C-suite executives of key Fortune 500 and private equity-backed companies. Connectivity with these types of executives is an important element for these firms, who often rely on these individuals to fill key portfolio company management positions as well as sit on portfolio companies’ boards of directors. Further, these executives may help with investment due diligence. Large private equity firms often have decades-long relationships with key investment banks and other providers of corporate access. Given that large private equity firms’ portfolio, companies often pay hundreds of millions of dollars in fees to investment banks each year for M&A and capital markets activities, investment banks do everything they can to help private equity firms including access to the most desirable company sales processes and connections to corporate management teams.
Beyond this suite of operating advisors, the largest private equity firms also have extensive non-investment functions that they use to execute and support their investment activities. Generally, only the largest firms have sufficient scale to support the extensive cost of this type of supplementary infrastructure. This can take a range of forms but often includes dedicated teams focused on capital markets, communications, government relations (potentially including dedicated lobbying efforts), and other fields. These capabilities enable the largest firms to pursue a range of important functions, including ongoing dialogue with key capital providers to their portfolio companies (such as leveraged finance and equity capital markets participants) and government entities responsible for legislation and regulation that can affect portfolio companies or the private equity firm itself.
The largest private equity firms typically have access to the most sought-after talent. This is due to the fact that the largest private equity firms typically (but not always) offer the highest levels of compensation and work on the most high-profile, complex, and interesting transactions. Given their extremely large fund sizes and the fact that funds typically do not scale headcount as quickly as assets under management, the pure size of management fees and carried interest pools allow the largest funds to offer employees high levels of compensation (although carried interest is typically only awarded to more senior investment professionals). Given these companies’ size, they also often work on the biggest transactions that make the most headlines. The opportunity to work on this type of transaction can be very appealing to aspiring private equity professionals, who relish the prominence and career development opportunities of working on industry-transforming transactions.
The largest private equity firms also have access to and can execute the most complex and unique deal structures. In some cases, the largest private equity firms create access to larger deals purely on the basis of size. For example, consider a $10 billion private equity transaction. Assuming a 40% equity check, the private equity firm would have to invest $4 billion. Only a small number of funds are able to commit over $1-2 billion on a given equity check (otherwise the deal would be too large with respect to the overall fund given that most private equity funds aim for 10-20 deals per fund). However, even the largest funds would likely still need to syndicate some portion of this equity to other co-investing sponsors or limited partners. Beyond large deals, the largest funds also can offer creative, structured solutions such as the $1 billion debt and equity investment made in Airbnb by Silver Lake and Sixth Street during the peak of the Covid pandemic.
In today’s environment, many of the largest private equity firms have evolved into publicly-traded behemoths called “alternative asset managers”. These firms now offer many investment funds beyond core private equity. These funds may include growth equity (often for the technology or healthcare industries), opportunistic hybrid financing, distressed credit, and industry-focused funds that allow them to cover a wider range of deals and gather intel that informs investment practices firmwide. For example, many alternative asset managers will have natural resources funds that invest in commodity projects. This information can then be used to inform the private equity fund’s investment strategy in the corporate securities of commodity-exposed companies.
These large fund sizes do come with risk, however. The larger and larger a fund becomes the fewer companies that exist within the fund’s investable universe. This hasn’t been much of an impediment in the past decade, but recent economic uncertainty has led to difficulty in the mega-cap fundraising environment. Private equity growth has continued unabated for a long time, and interested observers should be keen to stay attuned to developments in this market.
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