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In the world of private equity, a critical component of success involves evaluating what the trend is for a given industry or business. Among economic trends, there’s no bigger trend than GDP, a measure of all final production of goods and services. Is GDP, otherwise known as production, above or below trend?

An Exponential Trend of Real GDP per Person

The following figure looks at real GDP per person in the U.S. from 1948 to 2015 (real GDP simply means the figures are adjusted for inflation). The gray lines represent non-recession years. The red lines represent recession years.

The dotted line running through the real GDP per person figure is an exponential trend.  An exponential trend presumes that growth in the given data will continue at an increasing rate, meaning growth accelerates forever. The assumption of exponential growth has generally been used for almost all of American economic history.

It’s clear to see that if one assumes an exponential trend, as most economists have done in the past, real GDP per person is well below trend.  This suggests that there’s a long expansion ahead before there should be any concern of an economic downturn.

If real GDP per person grows at 3.5% from today until 2021 (nominal GDP of 5.0% if one assumes population growth of 1.5%), then real GDP per person may catch up with trend in 2021 or 2022, placing the next recession six or seven years off.

Obviously, this also implies that private equity probably has another long while to go before any concern of a peak would be warranted.

GDP per Person with Trend

Switching to a Simple Linear Trend for Real GDP per Person

What if the exponential trend line is no longer useful in evaluating potential American economic growth?

Here’s what the figure looks like with a linear trend. As shown, the picture is quite different.  Instead of being well below trend, real GDP per person is right about on trend.

Obviously, the message is quite different than the first graph.  If real GDP per person is already at trend, then there’s reason for market observers to start talking about the boom and potential peak.

GDP per Person with Linear Trend

Which Trend is Right?

The next question is obviously – which trend is right? This, of course, is partly science and partly art. If the American economy can experience a boost in productivity growth, then the exponential trend might be right. On the other hand, the linear trend might be more applicable for U.S. economic growth for the foreseeable future.

Causes for the Change in Trend

Among the reasons for the changing in trend economic growth are international competition for skilled labor, the aging of the labor force, the shift to online work, and the hollowing out of America’s dominance in intellectual capital.

First, more-so than in the past, the competition for labor on an international basis is incredibly intense.  Inventors and others are increasingly likely to shift operations to the most desirable location, and the U.S. is no longer the most desirable location.

Second, the American labor force is also aging, putting downward pressure on productivity.

Third, not only is there headquarter-location competition, but there is also a shift towards platforms that are incredibly competitive, most notably the shift to online work.

Fourth, American labor no longer has such a large advantage in intellectual capital.  Lower cost competitors, including workers in China and India, may be shifting the American growth trend lower.


Overall, it depends on what you want to believe when it comes to trending U.S. GDP growth. If one assumes exponential growth is still applicable to real GDP per person, then economic growth is well below what it should be. If, alternatively, one assumes trend growth is now more linear, then real GDP per person is about at trend.

The difference in the message, of course, is obvious.


Unless the American economy completely unleashes in the next couple of months, the Federal Reserve is likely to raise the federal funds target rate sometime this year. The pending rate hike, at least if you believe indications from executives of the U.S. central bank, poses the question: what might a Fed rate hike mean for private equity deals in the coming year?

Federal Funds Target Rate

Looking at the Empirics

Of the many methods one could use to address the issue, one method is to see what the historical connection has been. The following graphic is such a look.

On the vertical axis is the percentage gain or decline in private equity deals since the start of the given tightening cycle. On the horizontal axis is the number of days the given cycle lasted. Each colored line represents a given Fed tightening cycle. The label on each line represents the month and year in which the Fed first started raising rates.

Discussion of the Empirics

Interestingly, Fed rate hike “seasons” are generally correlated with reasonably good private equity deal volume, as well as average deal value. The first graphic that follows is the percentage change in deal volume; the second is average deal value.

Overall, during the typical Federal Reserve tightening cycle, the average deal volume grows about 18%, while the median length of a Fed tightening cycle is 229 days.

There is, of course, a wide range of outcomes during Fed tightening cycles. Deals performed well during the tightening cycle that began in June 2004, whereas deals dropped more than 15% during the the tightening cycle that began in March 1988.

Private Equity Deals During Federal Reserve Tightening Cycles (Past 4)Average Value of Private Equity Deals During Federal Reserve Tightening Cycles (Past 4) What Does This Mean?

What does performance of private equity deals and value mean for the industry during the pending Federal Reserve tightening cycle? Essentially, there’s a positive bias to the data, meaning that a Fed rate hike will probably be correlated with continued strength in the private equity industry.  Of course, there’s also the change, albeit of a lesser probability, that deals will be affected the Fed rate hike.


If things according to what Ms. Yellen and other Federal Reserve executives have indicated, the Federal Reserve is soon to raise the federal funds target rate. Should the Fed take this step, it would be the first time in eight years that Federal Reserve bankers have considered any monetary tightening.

In looking at the performance of private equity deals by Federal Reserve tightening cycles, private equity deals generally continue on a strong path during Fed tightening cycles.  Unsurprisingly, any potential weakness in private equity deals occurs towards the end of Federal Reserve tightening cycles.


Tax policy comes as second nature to investment bankers.  Earlier this month, the Census Bureau  its annual accounting of state government revenues.  It is a survey of all finances related to state government spending. The data allows researchers to address, in a broad way, various debates in the tax policy world.

Among those debates, the most contentious is probably the recent tax cuts in Kansas. Kansas enacted broad-based tax reform in an effort to improve its long-term economic outlook.  Among the major components was reducing the income and corporate income tax rates and eliminating income tax on pass-through entities.

The debate, unsurprisingly, was whether the tax cuts would pay for themselves over time by inducing stronger employment growth. The recently released data provides an initial insight.

Income and Corporate Tax Revenue Across States

The tax change comprises two components.  The first is the revenue side. The following table is a look at how income and corporate income tax revenue has performed by state since 2012, sorted by growth in the tax burden.

Interestingly, and completely unsurprising, income and corporate income tax is down about 13% in Kansas, about 5% below the next closest to the bottom – Delaware (-8%). The revenue decline in the initial years is as expected.  Tax cuts take time to pay back.

Table of Percentage Growth in Income Tax

The next question is – did the tax cuts boost economic growth in Kansas above what happened in other states?

The Employment Picture by State

With the revenue picture looking about as expected, here’s a look at the employment picture.

As a reminder, the crux of the debate, at least according to the way Mr. Brownback sold it, was not whether revenue would go negative in the initial year, but rather that employment growth would be boosted. Here’s the early look.

Fascinatingly, Kansas appears to have experienced a boost in employment growth relative to other states, exactly as Mr. Brownback said it would. The increase is shown by the acceleration in employment (acceleration is the percentage change in the year-over-year growth rate). In Kansas, employment growth accelerated by 31%, much better than most other states.

As mentioned, it’s still early, but the early evidence certainly appears to be in Kansas’ favor – tax cuts are boosting employment growth (it just takes time for the investment to pay off).

Employment Growth
State 2013 (Avg. Y/Y Growth) 2014 (Avg. Y/Y Growth) Acceleration
Wyoming 0.17% 1.19% 587%
Arkansas -0.02% 1.08% 398%
Pennsylvania 0.26% 0.80% 211%
South Dakota 0.84% 1.38% 64%
Kentucky 1.06% 1.59% 50%
New Hampshire 0.85% 1.26% 48%
Georgia 2.06% 3.02% 47%
Oregon 1.92% 2.77% 44%
Alaska 0.35% 0.47% 35%
Nevada 2.58% 3.44% 33%
Vermont 0.78% 1.03% 32%
Kansas 1.16% 1.52% 31%
Tennessee 1.59% 2.08% 30%
Wisconsin 1.02% 1.32% 30%
South Carolina 1.95% 2.52% 29%
Florida 2.51% 3.23% 28%
Indiana 1.23% 1.52% 24%
North Carolina 1.77% 2.11% 19%
Washington 2.37% 2.78% 18%
Alabama 0.93% 1.09% 18%
Illinois 0.95% 1.11% 17%
Nebraska 1.18% 1.34% 14%
North Dakota 3.42% 3.85% 13%
Colorado 2.99% 3.32% 11%
New York 1.52% 1.68% 11%
Ohio 1.25% 1.36% 9%
Maryland 0.86% 0.91% 5%
New Mexico 0.84% 0.86% 3%
Idaho 2.54% 2.61% 3%
Texas 3.01% 3.07% 2%
Louisiana 1.39% 1.41% 1%
Rhode Island 1.30% 1.29% -1%
Delaware 2.21% 2.20% -1%
Iowa 1.29% 1.28% -1%
California 3.22% 3.05% -5%
Massachusetts 1.73% 1.62% -6%
Mississippi 0.81% 0.75% -7%
Connecticut 0.79% 0.73% -7%
Missouri 0.94% 0.86% -8%
Utah 3.23% 2.95% -9%
Michigan 1.87% 1.70% -9%
Oklahoma 1.31% 1.16% -12%
Minnesota 1.70% 1.41% -17%
Arizona 2.34% 1.92% -18%
Maine 0.60% 0.47% -23%
Virginia 0.71% 0.45% -36%
New Jersey 1.16% 0.70% -39%
Hawaii 2.04% 1.07% -47%
Montana 2.01% 1.01% -50%
West Virginia -0.20% -0.38% -289%



Overall, early evidence on the Kansas tax experiment appears generally positive. As anticipated, corporate and individual income tax revenue is down from the prior year.  This occurs because it takes time for tax cuts to work their way through the economy.

At the same time, employment growth in the Sunflower State is accelerating, with employment acceleration the 12th highest among all states in 2014.

It’s still too early to address statistical causation, but early evidence points towards Mr. Brownback’s favor.  His tax cuts are boosting employment growth, with revenue taking some time to pay back on the investment.


Looking at Demographics and What It Might Mean for Private Equity

May 4, 2015

As a general rule, private equity professionals pay little attention to demographic shifts. That is, at least, on the surface. But, demographic shifts are certainly set to impact the makeup and nature of the private equity business. Generation Demographics As background, here’s a look at the projected population from 2015 to 2050 for the major generations. The […]

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Is There a Growing Gap in Private Equity Pay?

April 20, 2015

Pay in the private equity industry is on the rise. As is always the case in a highly competitive, human capital intensive industry, the question is: pay is on the rise for who? Looking at Some Broad Pay Issues Consider, for instance, the situation of Blackstone CEO Stephen Schwartzman.  His annual base pay is $350,000, and […]

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Thinking About Early Stage Venture Capital Investments in 2015

April 6, 2015

By most measures, 2014 was a fairly positive year for the private equity industry, in particular early stage private equity (typically known as venture capital). The relatively decent performance of private equity over the past few years has some analysts wondering whether the industry is approaching a business cycle peak. The concern for an industry peak only […]

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How Long Can the Labor Market Keep Accelerating? Hint: It’s a While

March 23, 2015

There has been lots of chatter recently about the strength of the U.S. employment picture. The early March knockout employment report, at +295K net new jobs, seems to have increased the discussion about whether the employment picture is peaking. Is it? How much longer can the labor market keep accelerating? (As a note, acceleration means that the […]

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Is the Tech Industry in a Bubble?

February 23, 2015

Recently, chatter has focused on whether the technology industry is in a bubble.  Is it? Individuals following say, home prices in San Francisco, one might get the impression that it is.  Since bottoming in January 2012 at about $621K, the median home price in the Bay Area is now approaching $1.1 million, a growth of […]

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2015 Chicago Booth Private Equity Conference

February 18, 2015

This Friday is the 14th annual Beecken Petty O’Keefe & Company Private Equity Conference. Each year, the private equity conference focuses on a unique theme through a series of fireside chat and panel sessions with various industry experts. This year, the conference’s theme is “Return Realization: Positioning and Timing the Ideal Exit.” The conference will […]

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A Record Year for Private Equity Buyouts

January 26, 2015

Pitchbook is out with initial estimates on the number of venture capital exits via private equity buyouts in 2014. Perhaps surprisingly, the figures show some incredible strength. Initial estimates put the number of private equity buyouts via venture capital exits at 138, an increase of about 25 percent from 2013. Private equity purchases via venture capital exits […]

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