Most investors in financial assets have pretty much a myopic view of asset wealth accumulation – stocks and bonds. Of course, it’s not just novice or certain types of advanced investors that place great weight on equities and debt – academia, the political world, and professional financial organizations tend to have a large portion of their focus on the stock and bond asset classes.
Why are stocks and bonds the favorite focus points when it comes to wealth accumulation? Well, besides the gigantic liquidity advantage over other asset classes, stocks and bonds are, by far, the second and third largest asset classes, with world public equity market capitalization around $60 trillion and bond market debt outstanding at around $100 trillion.
What’s the largest asset class and why isn’t it a focus of investors? Well, in part it is. The largest class is real estate, with the valuable global real estate market anticipated to grow to $155 trillion in the coming year. Real estate, though, is highly illiquid and generally requires a good deal more effort to finalize deals.
With this background in mind, how big is the private equity market as it currently stands and where could it go from here? Overall, the value of private companies worldwide is projected to increase to about $40 trillion in the coming year. This $40 trillion is only a small portion (about 16 percent) of estimated worldwide total net wealth of around $250 trillion for 2012.
Where is the private equity universe going? Obviously, it’s going up, and at a projected much faster rate the rest of the financial universe. For instance, private equity wealth stood at $30 trillion a few years ago, while total wealth was at $231 trillion. Over the last couple of years, the asset class is expected to grow by 25 percent, while overall financial asset wealth is anticipated to grow by only 8 percent.
Can private equity keep up the higher than general market returns with its growing popularity among investors? Well, the simple answer is – it depends. It depends upon the ability of the industry to attract the world’s brightest money managers and on high net worth individuals’ confidence in the industry’s ability to perform. Among the other factors that could impact the ability of the private equity industry to continue to attract a larger share of the $250 trillion plus global asset wealth market is its ability to stay illiquid. That’s right; liquidity isn’t generally a bonus for financial assets anymore, or at least when it comes to maximizing return. Now, by definition private equity isn’t liquid. Whether it will generally stay that way is yet to be seen.
Overall, the estimated wealth of the valued world is anticipated to grow to about $250 trillion in the coming year, with about $40 trillion of that being private equity. The 84 percent of wealth in other asset classes indicates that there’s still a lot of room to grow for the private equity universe, assuming the growth doesn’t induce individuals to enter the industry who lower the industry’s overall expected return.
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