What the Evolution of Private Equity Means for Investors

It has been fascinating to see how the private equity industry has evolved over a quarter of a century, from a niche investment category to the largest alternative asset class and a significant contributor to global economic growth. In this article, we take an up-close look at some of the key structural drivers that have propelled the industry’s growth over the years.

Private equity has been one of the fastest-growing asset classes over the past few decades. Assets managed by private equity funds grew 15-fold from 2000–2022 to $8 trillion. Investing in private equity is generally motivated by two main factors: excess returns relative to public equities and portfolio diversification. Historically, private equity has significantly outperformed investments in public equities. Gompers and Kaplan report that the median U.S. buyout and growth capital fund has outperformed the S&P 500 in 25 vintage years between 1995 and 2021. For today’s investors, understanding key forces that have influenced and continue to shape the private equity landscape may be helpful in determining whether the asset class merits portfolio consideration.

A shift from public markets – One driver of private-equity growth has been the shrinkage of public markets. The number of publicly traded companies in the United States has fallen from about 6,900 in 2000 to 3,952 at the end of 2024. This is attributable to several factors. For one, many midsize and smaller public companies have gone private after concluding that the cost and regulatory burden of remaining publicly owned exceeded the value they received. Other companies no longer met exchange listing requirements or felt they could no longer attract sufficient investor attention in a public equity market increasingly dominated by passively managed index funds. Seeing these trends, many family-owned middle-market businesses, which in the past often considered a public offering in connection with succession plans, now prefer to remain private.

Private equity has provided these companies with an alternate path to accessing capital. At the same time, it has offered investors access to investment opportunities that historically have provided returns exceeding those in public markets. Currently, over 12,000 U.S. companies are owned by private equity firms, up from just over 1,900 in 2000.

From financial engineering to operational improvement – The early days of private equity coincided with a period of declining interest rates. Replacing equity with less expensive debt on the balance sheets of large corporations was a route to unlocking value. The 1990-91 recession in the United States, however, led to a rise in defaults and risk premia, initiating a trend of less reliance on leverage that has accelerated over the years. This has enabled private equity firms to serve a wider array of companies where cash flows are less predictable but where faster earnings growth can be attained in expanding markets through strategic and operational improvements.

Today, many private equity firms use their in-depth knowledge of various industry segments to enhance the operating efficiency of their portfolio companies, especially through the use of advanced technology, including artificial intelligence. In addition, portfolio companies that previously operated in isolation have found economies, synergies, and other advantages that come from being part of a larger entity where sharing intelligence and best practices is frequently encouraged and supported.