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Back to blog August 13, 2019 No Comments Author: Andy Jones

Growth in Private Equity Firms Over Time

The private equity sector has experienced tremendous growth over the last five years, in absolute number of private equity firms, in the funds committed to the sector, in the number of executives working in the industry and in the number of portfolio companies acquired.

In fact, private equity investments have become so prolific, that few industry sectors (if any) remain untouched by private equity. Ten years ago, many business owners, especially in the mid-market, were unfamiliar with private equity. Yet, today, most businesses have interacted with private equity in some fashion, either through an acquisition, growth capital injection, introductory meetings & preliminary conversations, or, at the very least, some form of marketing outreach.

Growth in Private Equity Firms

The graph below shows the trend in the number of PE firms over the past 5 ½ years, from our M&A Research Database at www.PrivateEquityInfo.com.

Because there are some caveats (discussed below) that play into the exact quantity of firms shown, this graph is best viewed as indicative of the overall trend in private equity over time. Clearly, the trend is one of growth. In fact, ~12% compound annual growth over 5.5 years.

Growth in PE Firms

Caveat 1 – this data is based on the number of PE firms in our database, which we believe is a good representation of the overall trend in PE. However, this data is subject to our ability to discover and add new firms. I should also note that we have fairly strict guidelines on which firms may be included in the database. Consequently, it’s the trend here that is more important than the absolute value (which might be more subjective).

Caveat 2 – the data in the graph includes both “active” and “inactive” firms. (“Inactive” might mean: merged or dissolved since their original inclusion in the database. We retain these firms for posterity). ~80% of the private equity firms are “active” over time.

Growth in Private Equity Owned Portfolio Companies

With an increase in the number of private equity firms in the market, we would obviously expect an increase in the number of private equity-owned portfolio companies, shown in the graph below. And we do.

Growth in PE Portfolio Companies

Caveat 3 – the data for the chart above includes both current and prior investments. It therefore may be interpreted as the swath of the overall macro economy touched by private equity (at some point in time). Further, the data represents platform investments and not add-ons.

How Growth Shapes the PE Industry Over Time

Perhaps more interesting is the ratio of these two data sets over time. That is:

(number of portfolio companies) divided by (number of private equity firms).

Ratio of Portfolio Companies to PE Firms

Over the past five years, this ratio is clearly declining.

Considering the data used in this analysis includes both current and prior investments, one would expect this ratio to steadily increase, all other factors held constant. That is, had the numerator, (number of portfolio companies), only included current investments, the decline in this trend line would be more substantial than shown above. The fact that it declines, despite including prior investments, is even more significant than the graph might suggests.

What Might We Infer from This?

Presumably, this downward trend is influenced by two factors:

  1. The introduction of new private equity firms to the marketplace. It stands to reason that newer firms have fewer investments, simply because they have not had time to build their portfolios, as they eventually will. Therefore, PE industry growth overall would account for some of this decline.
  2. The increase in middle-market and lower-middle market PE investors. From our previously data studies (PE fund size distributions and PE Firms moving down market), there is a clear trend of PE firms moving down market. My hypothesis is that the private equity firms focused on smaller acquisition targets have smaller deal teams and acquire fewer portfolio companies, on average. I will make a note to perform a follow-up study to test this hypothesis… looking into the average number of portfolio companies held as a function of PE firm size.