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Home » PRIVATE EQUITY

Financial Crisis Tests the Private Equity Industry

private-equity-investment-firm-market-fundWhether you are an investor, trader, or just a consumer, the financial crisis has affected EVERYONE.  Though many sectors of the investment world have been hit hard, few can compare to the private equity market.  Since it is intimately tied to stock performance, as you will see, it can become VERY volatile in times of panic.  In this article, we will provide you facts which demonstrate this point, while also covering the rapid growth AND decline of private equity over the last decade.

Before the crisis, the private equity market had been flourishing since its “MVP year” of 1978.  In this year, venture capital investments SKYROCKETED from a measly $39 Million in 1977, to an astounding $570 Million in 1978.  You may be asking yourself, “What could cause a 1000%+ increase in private equity investing in just one year”?  Well, that’s a question with a two-part answer. First, the government lowered the capital gains tax from a maximum of 49% to 28%, leaving investors with HIGHER net profits.  Second,  the government removed some of the strict legislation from ERISA, allowing pension funds to become major investors in private equity funds.  As a result of these new laws, institutional investors began piling into the private equity markets and things were great, until it all came to a screeching halt in late 2007.

Once market sentiment changed during the HEART of the financial crisis, it was almost impossible to find investors for private equity.   Unfortunately, with little to no faith in the economy, MOST of these investors left the market, protecting themselves from future risk.  Though this was the case in almost EVERY investment market, as you can see in the graph below, it was especially true in the private equity industry. Scroll down and take a look!

private-equity-market-fund-investment1

When you first glance at the chart, you have to be amazed by the HUGE drop in equity from Q4 2007 to Q2 2009.  Believe it or not, $178 Billion was raised by private equity funds in 2008, and ONLY $12 Billion was raised in 2009!  That’s a 93.3% DROP in money raised over just one year! As you can see, raising money in the private equity markets is almost impossible when there’s poor market sentiment.  The reason for this is simple, steady growth is what interests private equity investors, not “value hunting” during unstable times.

The reality of the current economy is this, there has been a massive financial disaster that has affected every market world-wide, and though it seems to be coming to an end, it may take years to fully resolve.  Now in the aftermath there is still plenty of hope, but the fact is, many investors are badly scarred from these recent events.  Despite all of the “fear” in the market, remember this, if you time things right in a depressed economy, you CAN “turn dust into diamonds” while it recovers.  To illustrate this critically IMPORTANT point, we have provided another chart below!

private-market-industry-investor-equity

As you can see, private equity has rebounded faster than any other market, and it is VERY likely this will happen again.  Though it can be quite volatile at times, volatility isn’t always a bad thing. Remember, the smart investor buys during the “overcast”, and inexperienced investors wait until the sun comes out.

In summary, despite the turmoil from the recent crisis, the private equity market has a bright future for decades to come.   With the information and charts we have provided, you now see how private equity funds can either become rich or insolvent from a financial crisis.  It all depends on the strategy, timing, and expertise of the fund manager, just like every other investment

InsideTrade LLC Staff
Phone: (949) 444-2111

4 Comments »

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