An Ocean of Capital: Saturation in Private EquityPE
First it was rumors. The grapevine of talk from otherassociates and friends from the where I did my banking stint. Of course, gossip is one thing we’re all used to from our investment banking days and just like at our old jobs ,there was no shortage of juicy gossip. However, I brushed a lot of it off as standard ex-banker complaining. After all, everyone loves to complain in finance.
But then came the calls. Headhunters that I haven’t talked to for a year were suddenly emailing me and calling me to “catch up”. Was this a new hiring boom in a new vertical of finance? Unfortunately no, it was open PE positions that were looking for laterals. Complaints of a saturated market and the inability to get deals done were no longer just harmless complaints from overworked associates. Apparently the rumors were true. PE associates were leaving their jobs for business school, startups, hedge funds, corp dev, etc.
The(and any investment related industry in general) was oversaturated. There was too much capital in the world. This may be hard to believe, but according to a very recent Bain & Co. research report, total financial assets are nearly 10 times the value of global output of all goods and services. Let that sink in for a moment...
What’s worse is that a major emerging market, China, which was thought to be an investment sink, is actually generating more capital than they are absorbing. What you will see by 2020 is the global world of capital turned upside down as there is too much capital and not enough attractive investment opportunities.
Now we can discuss the implications of this all day, but what does this mean for YOU, the junior member of theor investment team? Well, not a whole lot except for the fact that you’ll do more bitch work and less deal execution. However, is still a good place to be in the future? Is it still worth it to get that costly MBA and return?
My answer is, yes, but with a caveat. One major problem with illiquid assets and too much capital is the inevitable creation and likelihood of bubbles. The housing bubble would be nothing compared to a future bubble as capital grows and the stakes get higher. And yes, maybe you can still make those great returns if you can find a bigger fool to buy it from you, but that is a reliance on the bubble and timing the market, which no good investor should rely on.
However, the same research report lists solutions around this capital saturation problem. One solution is to aim for the long term. Game changers. Things like cheap renewable energy, nanotechnology and robotics. It’s going to be harder and harder to achieve an attractive short term return (traditional 3-5 yearmodel) so you really do need a platform that will last. Another solution is a focus on operations and real value add / expertise. Good management teams will be very important for realizing value. For most of you, this may be a great time to start a business and prove your worth.
Finally, emerging markets still hold ample opportunity. Even though their financial systems often lack liquidity, depth and breadth, regulatory consistency and transparency, this “bottleneck” may eventually subside over the next few years and allow for new investment opportunities for literally billions of eager consumers.
Everyone hates change, but of course change is inevitable. I’m actually quite optimistic about the future ofand consequently, the future of investors in general. We might be over the traditional models and financial engineering of the past, but that’s not necessarily a bad thing. With the death of the old comes a new era of operational improvement, entrepreneurial focus and of course, a truly global financial community as we shift our focus towards the emerging markets.