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Everyone knows that the private equity business is about making profits.  Common sense would indicate that when corporate profits are growing strong across the board, employment in the private equity industry would also be going strong, and vice versa. Is this the case?  Here’s a look at the connection between employment in the private equity industry and corporate profits.

Employment in the Private Equity Industry

First let’s take a look at employment in the private equity industry since 1990.  Following the actual employment graphic is a look at the year-over-year picture of employment in the private equity industry. Overall, since 1990, there have been 3 private equity slowdowns.  The three occurred in 1994, 2001 to 2003, and 2008 to 2009.

Of the 3 private equity downturns, the worst was followed by the technology bubble in 2001 to 2003.  During the 2001 to 2003 downturn, private equity employment declined by 2,500 employees. The next least positive private equity recession occurred in 2008 and 2009, when private equity employment declined by about 2,400 from peak to trough.

Private Equity Employment

Switching to the year-over-year picture, the largest decline occurred in August 2009, when private equity employment was down about 6% from the prior year.

YY Growth in Private Equity Employment

Corporate Profits

As background, here is a look at the corporate profits picture.

Corporate profits have been through 2 long periods of weakness. The first was a very slow downturn, from 1998 to 2002. The second came as a result of the recent global financial crisis, with corporate profits weakening from 2006 to 2009.

Corporate Profits Dashboard

Connecting the Two

So, does it look like private equity employment is connected with economy-wide corporate profits? Here is the connection.

Overall, conventional wisdom is probably right on this one.  Private equity employment is somewhat connected with economy-wide corporate profits. The interesting thing isn’t perhaps that there’s a general connection, but rather which indicator provides a leading indication.

One might think that corporate profits would be the leader.  After all, why would private equity employment decelerate or decline when corporate profits are strong.

Interestingly, this presumption would have been somewhat right in the slow 1990s corporate profit slowdown.  During the period when corporate profits were weakening, private equity employment for most of the period was growing strong.  At its peak, when corporate profits were weakening, the private equity industry was adding jobs by as much as 10% (year-over-year). It wasn’t until the end of the corporate profit slowdown that employment in the private equity industry finally got dragged down.

A similar picture emerges in 2006, when corporate profits peaked and provided an indication a few months before private equity employment growth peaked.

YY Growth in Private Equity Employment and YY Corporate Profits


Overall, private equity employment generally responds to changes in corporate profits with a lag, consistent with conventional wisdom that private equity employment responds to changing economic conditions.  Employment in the private equity industry does not provide a leading indication of where corporate profits are heading.


Every financial professional is aware of a chart like the following.  The following figure shows the month-over-month growth in employment in the U.S.

Recently, job growth is the U.S. has been strong, with most of the recent months above 200K. The strength in the overall American labor market poses the question – how does private equity look in comparison?

Here’s a look.


Looking at Private Equity Employment Growth vs the U.S.

Here’s a look at year-over-year growth in private equity employment compared to employment growth in the U.S. Overall, it’s been an awesome private equity recovery and expansion.

Employment in the private equity industry is growing at about 7.2% year-over-year, much higher than the 2.2% the U.S. is experiencing economy wide. The boom years are here for private equity.

What’s even more interesting is the strength the industry has experienced since 2013. The oil boom may be gone, but not the private deal making industry.


Private Equity from an Historical Perspective

How does the strength in the private equity industry compare to prior growth periods? Here’s a look.

Overall, although the current 7% growth rate is strong enough to place 2015 in the upper quartile, the 1990s were even stronger. At the high-point, employment in the private equity industry peaked at 11% in March 1994. Other peaks include 1998 and 2000, both peaking at 10%.

So, although growth is strong, the private equity industry still has room to grow.


Looking at Private Equity Compared to Other Financial Sectors

How does the 7% growth rate in the private equity industry compare? Here’s a look at growth in the private equity industry compared to the hedge fund and investment banking sectors. As you can see, clearly private equity is the king.

In second behind private equity’s lead is employment in the hedge fund sector, up 5.2% year-over-year. In third is the beleaguered investment banking sector, with growth barely above the previous year at 0.2%.



Overall, employment growth in the U.S. is strong and private equity is among the leaders in employment growth. Through the first half of 2015, private equity employment is growing at 7.2% year-over-year. The 7.2% is well ahead of the hedge fund employment (5.2%), investment banking (0.2%), and employment growth economy-wide (2.2%).

In comparing the healthy 7.2% growth rate to prior booms in the industry, current conditions still leave room for acceleration. In 1994, employment in the industry peaked at 11%, while in 1998 and 2000, employment in the industry peaked at 10%.

It’s a good time to be employed – or looking for employment – in the private equity industry.


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.


Looking at Private Equity Deals by Federal Reserve Tightening Cycle

June 15, 2015

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 […]

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Perhaps Sam Brownback is Right – Tax Cuts Are Boosting Kansas Employment Growth

May 18, 2015

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 […]

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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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