BlackRock Identifies Factors Fueling the Growth of Private Equity

Secondaries and the search for reliable alternative data are the trends to watch for in private equity.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

The private equity boom is just getting started.

While 2021 proved to be a record-breaking year for PE firms, it won’t be the peak of growth for the industry, according to BlackRock’s 2022 Private Markets Outlook. Although the private equity market saw its size triple from $2 trillion to over $6 trillion in the past decade, it still makes up “only a small fraction of total global equity markets,” according to the BlackRock report. And private equity has shown itself to be a desirable asset class under the prevailing low-rate environment: From 2002 to 2020, it outperformed the MSCI World index and S&P 500 by 4.1 and 2.8 percentage points, respectively, with an annual rate of return of 11.5 points.

Lynn Baranski, global head of investments for BlackRock Private Equity Partners, told Institutional Investor that the long-term outperformance of private equity over other asset classes is attracting investors and driving growth. In addition, companies — especially those in the technology sector with higher-than-average valuations — are staying private longer, forcing investors into the private space. “Although all markets are expensive, PE multiples remain at a discount to public markets,” Baranski said.

One of the evolutions in the private equity space is the rise of secondaries, the report said. Once tailored for a niche group of investors, secondaries have become a useful way for general partners to hold on to their high-performing assets longer. By trading existing stakes in PE funds and portfolios, investors in secondaries have more control over their investment horizons. Secondaries have emerged as a flexible structure that allows investors to “unlock greater value and extend the longevity of strong companies in their portfolios,” according to BlackRock. Other popular changes in fund structure include longer-term funds and continuation vehicles or annex funds into which GPs can roll existing investments.

“There is a clear need today for flexible capital to meet the needs of high-quality companies looking to capitalize on both short-term and long-term opportunities for growth,” said Andre Bourbonnais, global head of BlackRock’s long-term private capital division. “Structural evolution in PE over the past few years shows market recognition of this trend and its value to investors.”

Baranski said PE secondaries help investors gain exposure to more mature portfolios “in an accelerated manner relative to traditional primaries.” The asset class also helps investors new to the PE market get quicker access to a more diversified portfolio. “We see clear drivers for growth and continued embracing of secondaries across all stakeholders in 2022 and beyond, given continued growth of the private markets asset classes and the fact that LPs and GPs alike are proactively engaging secondaries in active ways,” Baranski said.

Another trend among private equity firms is investing in technologies whose use was accelerated by the pandemic. PE firms are shifting investment targets to firms with a focus on enterprise software, cloud computing, and cybersecurity, according to the report. Cloud infrastructure, for example, drew $129 billion in corporate investment in 2020, up from $96 billion in 2019. “Today, you can’t look at any company without asking how technology can disrupt or accelerate that company’s business model,” Baranski said, adding that the adoption of such technologies “was accelerated by 2 to 4 years.”

PE firms themselves are also rushing to integrate cutting-edge technologies such as artificial intelligence and machine learning into the investment process. Because of the lack of public disclosure in the private market, PE firms with access to proprietary data can make smarter investment decisions than their competitors, according to BlackRock.

Leading digital technologies “can improve the ability to source more growth equity opportunities than a traditional sourcing process and can proactively identify disruptive companies before they are recognized by the broader markets,” the report said. “Alternative data, then, becomes an enhancer of the fundamental investment process and provides an information advantage for investors.”