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2014 is coming to an end.  With the year almost over, it seems fitting to review h ow private equity employment did through the year and what we can expect for the year ahead.

A Look Back at 2014 – Actual Employment

The following is a look at total private equity employment since 1990.  Overall, the soon-to-be-finished year was relatively good to employers and employees in the private equity field. Employment by firms classified as private equity added around 1,400 net new jobs this year, representing an increase of about 4 percent.  In hindsight, private equity industry employment is likely to have been the best year ever for total industry employment, having averaged a little over 36,000 for the entire year.

The industry is well on a recovery path after bottoming in May 2010 at around 33,000. In terms of trend, this year will mark the fourth year of upward momentum in employment growth for the industry.

The previous cycle, from October 2003 to August 2008, lasted almost 5 years.

Private Equity Employment (through2014) Sources: Econometric Studios, Moody’s, BLS

Looking Back at Year-Over-Year Growth

In terms of the year-over-year growth rate, 2014 looks even stronger.  The year 2014 started off with a bang, with year-over-year employment growth accelerating from 3 percent to 4 percent in July.  By contrast, the economy as a whole was only adding jobs at a 1.7 percent to 1.9 percent pace. The rate of growth decelerated a little bit in the (estimated) latter half of the year, going from 4 percent to 3.6 percent.  The economy as a whole is anticipated to have generated a year-over-year growth rate of about 1.9 percent.

The year-over-year growth rates for the current business cycle are generally good.  The industry appears to have avoided any potential “bubble” employment compared to previous peaks. In October 2006, private equity employment was expanding by over 5 percent. Interestingly, the previous two big private equity employment cycles were enormous by current standards.

In September 2000, private equity employment was expanding at a 10 percent year-over-year growth rate. In March 1994, private equity industry employment was speeding by at an 11 percent year-over-year growth rate.

In all, year-over-year private equity employment growth is somewhat subdued for private equity business cycles, although the industry is still adding jobs at twice the pace as the economy as a whole.

YY Private Equity Employment (through2014) Sources: Econometric Studios, Moody’s, BLS

 

Looking Forward to 2015

With the actual experience and year-over-year growth rates established, what can we expect in the coming year?

Well, if economic indicators are correct, 2015 is set to be a banner year. The first graph has the statistical ranges for the private equity employment forecast. Overall, statistics says a projected range of around plus 3,000 to minus 2,000 net new private equity jobs, with the mid-range of around 1,000.

What the statistical forecast doesn’t capture is the economic indicators. If economic indicators are correct, private equity employment may expand by 5 percent or 6 percent in 2015, meaning a total of 2,000 net new jobs.

Conclusion

Overall, in looking forward to 2015, the private equity industry appears poised for further expansion.  A baseline forecast is for the industry to see net new job creation of at least 2,000 new jobs in the coming year, bringing total industry employment to almost 39,000.  Employment in the industry at 39,000 would far surpass any previous year.

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Pitchbook recently released some interesting results of its environmental and social governance survey of PE firm policies.  The following is a review of some of the more salient points.

Existance of an Environmental and Social Governance (ESG) Policy

First, Pitchbook asked the 104 general and limited partners whether their firm had an ESG policy. Unsurprisingly, from 2012 to 2013 the number of respondents with a yes answer increased from about 30 percent in 2012 to 60 percent in 2013.

Interestingly, firms out of Europe tend to spend more time developing a policy.  Overall, almost 80 percent of the European firms’ respondents indicated that their firm had an ESG policy.  In the U.S., about 50 percent of respondents gave an affirmative answer.

Does your firm have an ESG management program

 

Timing of ESG Implementation 

If you were asked which continent had the highest percentage of firms answering “more than 5 years ago” to the question in regard to when their ESG policy was implemented, which continent would you guess? Surprisingly, about 25 percent of North American companies answered affirmatively compared to about 15 percent for European firms.

Perhaps the adage is true — European firms really do followed the American lead. Also interesting, the number of firms stating that they “do not have ESG initiatives” dropped from about 55 percent in 2012 to about 25 percent in 2013.

When did your firm start actively implementing ESG initiativesDriving Force of ESG Efforts

Unsurprisingly, respondents gave “Environmental and social consciousness” as the number one reason for implementing an ESG policy (multiple factors could be selected).  Interestingly, this response only gained a couple percentage points since 2012, rising to 73 percent in 2013. In second place at 69 percent is “Limited Partners”, down from 74 percent in 2012.

The remaining responses, in popularity order, include “Risk Management” (64 percent), “Brand/Image” (60 percent), “Corporate Governance” (45 percent), “Portfolio Companies” (36 percent), “Government Regulation” (31 percent), “Employee Interests” (29 percent), “Cost Management” (24 percent), “Operational Efficiency” (24 percent), and “Competitors” (11 percent).

What factors drive your ESG effortsTiming of ESG Issue Consideration

Lastly, when would you guess most PE professionals consider ESG issues? Likely unsurprising, of the four broad PE periods, “Fundraising” and “Due Diligence” come out on top. In 2012, about 85 percent of respondents indicated that ESG issues were considered in doing due diligence.  Interestingly, that number dropped to 80 percent in 2013.

The opposite trend occurred for fundraising.  In 2012, about 70 percent of respondents indicated that ESG issues showed up during this phase.  In 2013, that number jumped to about 80 percent.

On the bottom end, PE professionals generally give less attention to ESG issues during the “Holding” and “Exit” periods.

When do you consider ESG issuesConclusion

Overall, Pitchbook’s recent survey on firms’ implementation of environmental and social governance policies provides some interesting insight into the thinking of private equity professionals on the subject.

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Pitchbook is out with their third quarter numbers of private equity deal flow to the Information Technology (IT) sector.  Here’s a review.

Private Equity Deal Flow by Capital Invested and Number of Deals

The first graphic looks at private equity deal flow by capital invested and number of deals in the IT sector. In the third quarter of 2014, estimated private equity deal flow came in at about $15 billion, a decline from the $19 billion in the first quarter. Moving in a like direction, the number of deals also declined in the third quarter compared to the second quarter, dipping from 106 to 89.

In comparing 2014 deal flow to 2013, through the first three quarters total deal flow in 2014 is at about $48 billion, a small drop from the $49 billion seen through the first three quarters of 2013.  The fourth quarter of 2013 saw a gigantic $50 billion in deal value made, making it unlikely that 2014 deal flow will beat total deal flow value in 2013.

The recent IT sector deal flow also shows the surprisingly strong upward drift in deal value. In 2008, total deal flow value summed to $16 billion.  In contrast, total deal flow in 2014 is on track to perhaps surpass $70 billion in 2014. Interestingly, the potential $70 billion in deal flow is still $45 billion lower than what the private equity industry did in 2007, the year before the onset of the global financial crisis.

IT Private Equity Deal FlowA View on the 2015 Outlook

Van Wert and Sundar Raj, close observers of IT sector deal flow were somewhat subdued about the 2015 outlook – “The start of any year is usually a little soft … the debt market is still going to be the primary driver on a lot of these PE deals and their ability to trade at these high multiples …if the debt markets contract, you’ll see a pull-back on these deals and a fairly quick correlation on the multiples investors are willing to consider. On the other hand, if the public markets correct in the near-medium term, lower stock prices may translate into more take-private opportunities for PE investors.”

PE Transactions by Sector

With the broad view covered, here’s a look at PE transactions by sector. Interestingly, the software sector has dominated 2014 so far, accounting for over 60% of all private equity deal flow. In second place is IT services at around 15%, followed by Communications and Networking at about 10%, and Hardware at around 9%.

Private Equity Deal Flow by Sector.fwPE Deal Flow by Median Deal Size

Lastly, here’s a look at private equity deal flow by median deal size.

Overall, since collapsing in 2008 following the housing market bubble bursting, median deal size has been on a strong upward drift. Median buyout deal size has expanded from a low of about $40 million in 2009 to a 2014 high of about $160 million.  The $160 million median deal value in 2014 is $60 million higher than the previous 2007 peak of $100 million. Median growth deal size is much  more subdued.  Growth deal size has gone from a low of a little less than $10 million in 2009 to a recent high of about $23 million in 2014.

Buyout and Growth Median Deal SizeCautiously Optimistic

Overall, third quarter private equity activity in the IT sector was relatively strong, with the outlook cautiously optimistic for 2015.  What this holds for PE employment will play out as the deal activity starts to unfold in early 2015.

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Does Federal Reserve Policy Affect Private Equity Employment?

November 3, 2014

The Federal Reserve officially announced the end of quantitative easing at its October 2014 meeting.  The announcement of the end of quantitative easing (known as QE) presents private equity professionals with the question: How will an increase in the Federal Funds rate affect private equity employment?  Does what the Fed do affect the private equity industry […]

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What Does the Recent Geography of VC Investments Look Like?

October 20, 2014

In recent years, the venture capital and private equity industries have gained some serious ground.  Although industry conditions have improved significantly in 2014, there’s still room to grow, at least if one thinks the technology boom is where the industry needs to be.  Of course, even if one thinks the technology period was too much […]

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What’s Up with Recent Revenue Trends and Enterprise Values?

October 6, 2014

The private equity world has been through some rough times in the past few years.  Judging by the recent revenue and enterprise value trends, those rough times are now gone. Revenue Trends Depending upon the industry, interested investors, and the state of the economy, revenue is a critical component in deal evaluations. Given the importance of […]

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A Year into Italian Crowdfunding: How is it Looking?

September 22, 2014

It’s been a year since Italian policymakers loosened bureaucratic control over the start-up world.  How have things gone during the first year of Italy’s crowdfunding? Background of Italy’s Crowdfunding As some history, Italian politicians are the first in the world to allow retail equity crowdfunding, with “no” limits on investment options.  The “no” limits statement […]

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The Universities of Top VC-Backed Entrepreneurs

September 8, 2014

Pitchbook is out with their annual review of which universities are producing the most venture capital-backed entrepreneurs.  Where would you guess these entrepreneurs attended school? On top of the 2014 list are entrepreneurs out of Stanford at $3.52 billion. In second place is Harvard at $3.24 billion.  Rounding out the top ten are the Indian Institute […]

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The Performance of the Economy by President

August 25, 2014

Private equity professionals spend a good part of their day looking at balance sheet figures.  Here’s a break from the traditional look at financial numbers and instead a focus on how the economy has performed over the past 60 years’ – by each U.S. president. The five measures are Gross Domestic Product (GDP), Employment, Inflation, […]

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Should PE Professionals be Nervous When Looking at the Pace in Mergers and Acquisitions Volume?

August 11, 2014

In the mergers and acquisitions world (M&A), 2014 is off to an incredible start.  We’ve seen Valeant’s $46 billion proposal for Allergan (April 22).  About a month later, May 18, we saw AT&T acquire DirectTV .  On June 15, Medtronic acquired Covidien in a deal worth about $43 billion.  Earlier in the year we digested Comcast’s […]

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