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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is co-head of private equity at KKR
The private equity naysayers are out in force in 2025. Underlying the latest predictions of the industry’s demise is a notable mis-step many firms made by over-deploying capital during 2021 and the first half of 2022, a period characterised by high valuations.
Many of those investments will probably be underperformers. Consequently, private equity funds overexposed to these vintages may struggle to raise more capital. But is it the beginning of the industry’s downfall as some claim?
While some investors are reducing exposure to private equity, they are doing so only modestly. Yale’s endowment fund’s sale of some of its private equity interests has been cited as a harbinger of doom. However, it still insists that private equity is a core part of its investment strategy and that it is not reducing long-term target allocations. The reality is that demand remains strong and high-performing funds continue to be oversubscribed.
Commentators have been forecasting gloom for years. In the face of those predictions, private equity has grown at a remarkable rate. Assets under management have ballooned from $700bn in 2005 to $6tn today, according to PitchBook data. For perspective, it’s useful to look how public markets are doing. The number of public companies in the US has shrunk by nearly 50 per cent in the past 20 years. That’s a staggering decline.
Why is private equity thriving while the public markets are in secular decline? Both companies and investors simply prefer the private markets. Many companies have decided it isn’t worth dealing with the complexities of listing requirements, the focus on short-term performance, and activist investors. Investors are likewise drawn to the private markets. They value the fact that private equity funds have the luxury of selecting their companies, management teams, and operational strategies. And private equity value creation often lies in operational improvements which are uncorrelated with broader market movements.
Investors are also, of course, drawn to the superior financial returns. Private equity outperforms the most relevant benchmarks which are the Russell 2000 or S&P 600, which track businesses of a similar size to the majority owned by private equity. Private equity has outperformed both indices by more than 3 and 7 percentage points annually over the past five and 10-year periods, respectively.
So why the consistently dire predictions? Critics are rooting for a decline more than they are predicting it. To put it mildly, the underlying narrative that surrounds private equity is unflattering. The stereotype is that private equity firms use excessive amounts of leverage, strip down companies, fire workers and sell off the pieces. Yes, private equity firms use leverage but, on average, debt accounts for only half of the capital structure of a private equity-owned company, according to PitchBook data. Real estate transactions use far more leverage. There’s nothing inherently evil about debt, but it needs to be prudent.
The industry is by no means perfect. Mistakes have been made. While I cannot speak to the practices of all the many thousands of private equity firms, the idea that all they do is slash workforces and strip assets is simply untrue. Such a strategy would logically be self-defeating because private equity firms eventually exit their investments and buyers would look through any short-term boost to profits. The industry’s growth and the calibre of chief executives eager to work with private equity firms suggest a different reality.
And this reality has the potential to be so much greater. Private equity’s governance model allows for the rapid deployment of proven initiatives. If a single private equity firm, for example, decides to share ownership with workers, that could quickly impact hundreds of thousands of employees. And that could be just the beginning.
A private equity firm’s portfolio could also be an innovation hub for developing ways of improving workers’ lives, enhancing corporate cultures and delivering even stronger returns. Boosting employee engagement, providing emergency assistance funds for workers, teaching financial literacy and developing empathy in corporate leadership are just a few of the things we at KKR and others are working on.
I have no doubt that the private equity industry will continue to grow. It just offers too many advantages. My hope for the industry is that more of the advantages one day extend to workers. Not only could we impact millions of employees, but we could also create better outcomes for our investors. Who knows — it might even get people rooting for us.
