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How Many Private Equity Firms Are There?

By Generational Equity

private equity firms

Throughout the years we have talked quite a bit about private equity (PE) firms – how they operate, what they focus on, and how they can add tremendous value to their holdings by providing not only capital but managerial talent, financial strategies, and marketing/sales muscle. But what we haven’t analyzed is how all these features are actually driving firms’ growth and expansion.

A recent article on PitchBook, a leading research organization focusing on alternative investment sources, caught my attention. Because for the first time, it became clear that for sellers looking for full or partial investors, now is the best time in our history to find them. There are more PE firms looking for deals than ever before. This is how PitchBook describes the historic growth in PE firms:

The private equity industry has seen substantial growth over the last 30 years. As the industry model has proven to be a very lucrative venture, more and more firms have crowded the PE marketplace, vying for the choicest targets. As you can see below, during the 15-year period from 2000 to 2014, there has been a 143% rise in active* firms globally.

*Active firm is defined as either having raised a fund in the prior five years OR completed a deal in the prior three years.

Quite frankly, I was shocked to see this graphically. Intuitively I had assumed that there was tremendous growth in the number of equity firms worldwide since 2000; however, to see a 143% increase in the number of active firms was amazing. Two key points from the paragraph above the graph:

  1. This growth has been driven by the fact that equity firms have perfected the model and it is proving to be financially beneficial to both sellers and investors.
  2. These 3,530 firms are “vying” (a.k.a. competing, contending, and contesting) with each other for targets.

Both of these points are vital to consider. If the equity firm model of investing in and building had not proven its worth, we would not have seen 143% growth in the number of firms. Secondly, what makes this growth even more compelling is that this is great news for owners of businesses looking for buyers and investors because there is LOTS of competition among acquirers!

We hear this all the time from professional buyers that we work with: They simply are not seeing enough quality deals on an annual basis and would love to see more.

Location, Location, Location

Some of you may be saying, OK, that data looks great but I bet that most of the new firms formed would be in Asia and other parts of the world that would have little interest in my small U.S.-based company. Although the fastest compound annual growth rates were found in Asian countries, traditional geographies like North America and Europe created the lion’s share of new equity firms by far, in terms of sheer numbers:

Note: The table above shows the change in active PE firms by their headquarter region over the past 15 years, and PitchBook has ranked each region by the compound annual growth rate (CAGR) of active firms.

In fact, if you do the math, of the 2,077 new firms created from 2000 through 2014, almost half were headquartered in North America. Since many equity firms choose to invest regionally and nationally, this is amazing news if you own a business in the U.S. or Canada. Again, based on this data, you simply have more capital out there chasing investment opportunities. And what happens when more money is chasing a limited number of transactions? Valuations rise, deals close faster, and entrepreneurs achieve their liquidity dreams.

For many of you, like me, the mercurial rise in the number of equity firms is quite a pleasant surprise. Now, of course, not every privately held company is a target for an equity firm. But the only way you will ever know who the optimal buyer for your company may be is by hiring an M&A advisor like Generational Equity that has the skill, experience, and reach to help you determine this.

Buyers of all types like working with us. They don’t like the premiums we get for our clients, but they like the fact that we have committed sellers who have reasonable value expectations. And, most importantly, they appreciate the fact that our deals close, and due diligence goes much smoother with us involved. A principal with a private equity firm once told me:

What I have plenty of is capital to invest; what I lack is time. If I work six months on a deal, it had better close because not only do I lose that deal, I lose the opportunity cost of closing 2-3 others instead.

So because our deal teams are experts at creating saleable companies, PE buyers (and strategics as well) like working with us.

What does all this mean to you, the owner of a privately held company? Plenty but especially this: If any of this is news to you, then you need to attend an educational Generational Equity exit planning summit. We hold these regularly throughout North America (and beginning in October, in the U.K.) for one reason: To help business owners understand the options available and to act on them.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

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