Big is Better: Growth and Market Structure in Global Buyouts

Assets under management in private equity have grown exponentially in recent years. In the first six months of 2007, global buyouts totaled more than $560 billion, and accounted for about one quarter of mergers and acquisitions transactions worldwide. Despite the recent pullback in credit markets, it could be yet another record year for the industry. The growth of private equity has been accompanied by profound changes in its industry structure. The bulk of new commitments has gone to a few mega-funds, allowing them to target increasingly larger companies. Today, the largest 10% of the funds account for almost two-thirds of all capital raised in the U.S. and Europe. And the world's four most active buyout firms in 2006 participated in deals worth $357 billion, representing about 50% of the entire global buyout volume in that year. At the same time, however, a flood of new entrants at the small end of the market has served to hold down conventional measures of concentration in the industry. But if private equity doesn't seem to be exceedingly concentrated when bench-marked against other financial industries, the authors argue that the size distribution of potential buyout targets, together with the fee structure, will continue to provide important incentives for individual general partners to expand faster than their peers. On the other hand, raising ever larger funds may not be a sustainable solution given the tendency of returns to fall with increases in fund size. For this reason, the authors suggest that buyout firms are now more likely to pursue a strategy of entering new geographic markets such as Asia and new investments like infrastructure and real estate.