Through recent years, alternative investment asset classes such as private equity have become increasingly important pools of capital in the global financial system.
Private equity activity in particular (defined as equity investments by professionally managed partnerships that involve leveraged buyouts or other equity investments with a substantial indebtedness) has accelerated noticeably. The total value of firms (both equity and debt) acquired in leveraged buyouts is estimated to be $3.6 trillion from 1970 to 2007, of which $2.7 trillion worth of transactions occurred between 2001 and 2007.
The asset class has grown in scale such that by 2005 about 2% of non-government US employees worked for firms that received private-equity investment, and in global scope such that a majority of private equity transactionsnow take place outside the United States. Simultaneously, many private equity firms have expanded dramatically in size and global reach, and the sector has attracted attention from many other players, such as politicians, regulators and organized labour.
In 2006, in recognition of the increasingly important role and impact of private equity and other alternative asset class investors on the global environment, the World Economic Forum launched its first new industry group in over 10 years, focused on the Investors Industry.
The objective was to take advantage of our organization’s multistakeholder platform and link these industry players with the diverse constituents already engaged with the Forum. Over 30 companies from the sector have since joined the World Economic Forum’s Investors Industry Partnership, committing to discuss key issues on a global and crosssectoral basis and engage in dialogue, research and action to address them.
New asset classes rise to the fore
The recent financial crisis has resulted in a heightened interest on the part of policy-makers to understand the impact of both traditional financial institutions, such as banks and insurance companies, and alternative investment asset classes, such as private equity and venture capital, on the global economy.
Policy-makers are understandably concerned about systemic risk and the role that governments can play to ensure both stable economic development and growth. As governments worldwide rethink their approach to regulating financial institutions, understanding the significance and impact of alternative investment asset classes, such as private equity and venture capital, is integral.
Private equity and venture capital have both become far more important around the world in recent years, yet our understanding of both these asset classes remains relatively limited.
The World Economic Forum's project on the Globalization of Alternative Investments began in 2007 to provide a fact-based look at the global economic impact of private equity. The project brought together a team of international scholars to conduct in-depth analysis of the impact of the private equity industry and its transactions. Prior to the launch of the research effort, existing literature on private equity had primarily focused on a relatively small number of transactions in the US and the UK conducted in the 1980s.
For the purposes of the Forum's research project, private equity is defined as investments by professionally managed partnerships that involve leveraged buyouts (LBOs) or other equity investments with a substantial amount of associated indebtedness. Venture capital, on the other hand, is dominated by equity investments in start-ups or growing firms.