Jeffrey Kadlic: Three facts to disprove mainstream media assumptions about private equity

 

I have been in private equity long enough to feel a strong kinship to others who participate in the industry and am well aware that, like any group, you are going to have a few who you may not particularly care for — and that goes for me too.

But how we are portrayed, as a group, in mainstream media as no better than Wall Street, underperforming and heartless, is off base, and I would say even a bit unfair.

 

Performance and investor alignment

According to an April 2013 article titled “Private Equity Performance: What Do We Know?” by Robert Harris, Tim Jenkinson and Steven Kaplan, private equity outperforms public markets by 20 to 27 percent over the life of a fund (or about 10 years).

Sure, private equity investors make a lot of money, but so do investment professionals on Wall Street. The difference is that private equity professionals only make money after they have returned money plus a preferred return of anywhere from 6 to 10 percent.

Private equity professionals are uniquely aligned with their investors. Wall Street is not.

 

Helping retirees

Private equity is also becoming increasingly important to retirees as U.S. pension funds allocate more and more to the asset class. According to a February 2013 report from Bain & Co. titled “Global Private Equity Report 2013,” the largest pension plans in the country, those with more than $5 billion in assets, increased their allocation on average from 8.3 to 9.7 percent. That may not seem like a tremendous amount, but in the world of asset allocation, this is lighting speed.

The next time retirees see a story about private equity, they ought to dig into the details of their own pension plan to see where they are making money.

 

Job creation

Finally, private equity creates jobs.

I saved the best for last because I suspect this would shock many. Most of the following facts are sourced from a wonderful research paper authored by Private Advisors, a highly respected asset management business.

Written in January 2014,“Private Equity & Job Creation” acknowledges that there are private equity managers who ascribe to the “buy it, strip it and flip it” mentality. But their data set, including 231 private equity funds that were pursuing a variety of different strategies, shows 78 percent of the underlying companies added jobs, 20 percent saw declines in headcount and 2 percent were relatively flat.

The actual increase in jobs in this data set was about 48,000, which represented a 56 percent growth rate (excluding follow-on acquisitions).

Private equity is unfortunately not very well understood because almost all of it is private. The industry as a whole probably needed a kick in the pants by its investors to modernize, be more transparent and differentiate itself from the pack.

The relatively new self-regulating body, The International Limited Partners Association, is providing this much needed order and structure. But in the end, private equity is transformational — because with capital and a little bit of brain power, a lot of good happens. Often something does come from nothing. So please, I ask you, go a little easy on us.

 

Jeffrey Kadlic
Co-founder and managing partner

Evolution Capital Partners LLC, a private equity fund investing growth equity nationwide in Second Stage Companies.

Jeffrey is alumna of Crain’s Forty under 40 and EY Entrepreneur Of The Year™ finalist. 

www.evolutioncp.com

 

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