The Economist on the Private Equity Industry


29 November 2004

Managed to catch up and read The Economist this weekend. Their survey, The new kings of capitalism (subscription required for most articles – do yourself a favour and subscribe), considers the private equity industry and is recommended reading.

Yet to study [private equity] firms such as Blackstone is as good a way as any to find out what is going on at the sharp end of capitalism today. Hedge funds may be sexier, at least for now, but it is surely Mr Schwarzman and his peers in the private-equity industry who control the really smart money and wield the lasting influence. This survey will explain what they do, what challenges they face and what effect they have on the world of business at large.

In the 1980s private equity was a place for mavericks and outsiders; these days it attracts the most talented members of the business, political and cultural establishment…. Private equity’s transformation into a mainstream industry has been greatly helped by a fundamental change in the sort of deals it does. […] Hostile deals are now extremely rare. […] Indeed, big companies that would once have turned up their noses at an approach from a private-equity firm are now pleased to do business with them.

Clearly, private equity is now a big business. In Britain, for instance, one-fifth of the workforce outside the public sector is employed by firms that are, or have been, invested in by a private-equity firm….

Yet the private-equity industry must now grapple with tough new challenges. These fall into three broad and overlapping categories: generating good financial performance; coming up with winning strategies in a rapidly maturing industry; and becoming more accountable to the public, and thus less private.