Josh, you also made some predictions – in our third issue – about what might happen next. The scenarios included LP desertion, a broken industry, boom and bust cycles, and that a few funds backed by a few LPs would do well, but the rest would disappear. How do you view these today?
With the benefit of hindsight, I can see that I underestimated the PE industry’s resilience and creativity. If I’d had a crystal ball back then and seen how much capital would flow to the industry in the 2010s, I’d have said this was a massive overfunding and that returns would go to zero. But I would have missed how GPs could expand their pool of investable assets. The value created by applying PE tools and capital to industries such as technology has been enormous. The expansion of the deals PE pursues has accommodated the amount of capital that the industry has attracted.
“It’s hard to say whether we will see more of the same over the coming period. We’ve seen the industry be super creative in the past and it could well continue to be so. But there is an alternative view. PE did well from the 1980s to 2020 at the same time as interest rates declined, leading to rising equity values. We are now in a new era and that may be less suited to the PE model. The jury is still out and there is evidence for both scenarios.”
Josh Lerner