Private equity’s primetime has arrived! This stems from a number of reasons, including favorable economic conditions for the private capital market. In fact, 42% of private equity limited partners report a 16% net return in this space. Here are three factors in particular that have caused private equity to outperform public equity in 2022.
1) Interest Rates:
A survey found that 71% of global private equity investors have indicated that their equity investments have outperformed their public equity portfolios since the global financial crisis. This is in part because private equity firms are less reliant on debt financing than public companies. Higher borrowing costs will hit public companies harder, putting them at a competitive disadvantage over private companies with rising interest rates.
2) Economic Uncertainty:
Some degree of uncertainty characterizes current economic environment. This can be attributed to the ongoing trade conflicts between the United States and China, Brexit, and the coronavirus pandemic. These factors have made it difficult for public companies to make long-term plans and invest for the future. Private equity firms, on the other hand, are better suited to deal with economic uncertainty. This is because they can take a longer-term view and are not as reliant on short-term results.
The increased regulation of public companies has made it more difficult and expensive for them to operate. Private companies are not subject to the same level of regulation, giving them a competitive advantage. Additionally, private companies can benefit from registration exemptions, like RegA+ and RegCF, which allow them to raise capital from everyday investors without the need to go public. This provides private companies a significant tool they can use to their advantage and fuel their growth.
These combined factors show that private equity has arrived and is here to stay. This will likely continue in the future, making private equity an attractive investment for investors. More individuals are involved in the private markets with the rise in forms of private investment for regulated and non-regulated investors, such as the JOBS Act regulations. This means more capital is flowing into private markets, which drives up valuations. With the current market conditions, investors would be wise to allocate a portion of their portfolio to private equity to protect and grow their wealth and prepare their portfolios for the future.