Private equity is one of the most modern investment tools available, with a history of less than 30 years. Essentially, private equity means that a group of high net worth individuals and institutions (such as pension funds), pool together funds and hire a professional management team, that then invests on their behalf.
The rationale: Why put savings with professional equity/bond investors, when you can have much higher returns investing in private companies? The number of companies owned by private equity, globally, exceeds $3b in the latest surveys: anywhere from the Hilton, Formula 1, Hugo Boss, and Hertz are owned by private equity (PE).
We interviewed Professor Garen Markarian, who teaches in WHU´s “Value Creation in Private Equity & Venture Capital Program”, on recent developments in the private equity sector.
WHU Executive Education: Professor Markarian, you are specialized in financial accounting, corporate finance and private equity. Is the private equity sector stable or do you expect changes? Are there differences in the markets in Germany and the rest of Europe?
Professor Garen Markarian: The last recent years have been a boom period for the wealthy. If there was ever a period where the ”rich are getting richer“ and the ”poor are not getting richer“, then that would be today. Now, without getting into philosophical discussions as to why this has happened, I would like to say that the most recent wealth accumulation by rich individuals and organizations, has led to a massive boom for the PE industry. The PE activity now has exceeded that of 2007, with more and more funds going into southern European countries, and east all the way to the Russian frontier.
WHU Executive Education: What are top issues for the private equity sector in 2017?
Professor Garen Markarian: Well, having boom times has its drawbacks. When there is too much money floating around, things become expensive. The wise person would invest extremely careful in today’s inflated valuations. Nevertheless, we still see a lot of money flowing in, and you suspect that a lot of these investments are not justified by their fundamentals. If I were to predict, we will witness a lot more bankruptcies five years on from today, because some investments were done over-exuberantly today. Greed – we know its consequences.
WHU Executive Education: What would you recommend to PE companies to be prepared for in 2017?
Professor Garen Markarian: More investments into South America, Africa, and the western part of Asia. There are strong headwinds in Europe and the USA, and if I were to be a pessimist, I would worry about the negative political fallbacks from European politics, combined with poor policy making in the USA.
WHU Executive Education: Thank you very much, Professor Markarian!
Would you like to improve your knowledge in private equity?
Learn more about WHU´s Value Creation in Private Equity & Venture Capital Program for managers: (LINK)