Looking at Demographics and What It Might Mean for Private Equity

As a general rule, private equity professionals pay little attention to demographic shifts. That is, at least, on the surface. But, demographic shifts are certainly set to impact the makeup and nature of the private equity business.

Generation Demographics

As background, here’s a look at the projected population from 2015 to 2050 for the major generations.

The largest group is the Millennial generation, individuals born between 1981 and 2000. Why is the Millennial generation expected to continue to grow when all births classified in this generation are already over?  The answer – immigration. Overall, the Millennial generation is expected to peak in the late 2030s, after which their numbers begin to decline.

A second interesting trend is how soon the Baby Boomer generation will no longer be the top “older” generation. In around 2021, Generation Xers will surpass Baby Boomers as the second largest generation. (Death is anticipated to reduce the Baby Boomer generation to around 25 million by 2050.)

Births by Generation

Here’s a look at births by generation.

Besides the ebbs and flows in births, one interesting observation is the drop in births among the Post Millennials.  The drop began in 2008, the first year of the worst recession the world has seen since the Great Depression.

Interestingly, the largest generation for births is the Baby Boomer generation, followed by Millenials.

What Does This All Mean for Private Equity?

Among the many possible ways demographics could impact the financial world, here are three.

First, with Boomers leaving the labor force comes a shift in expenditure patterns for the richest generation.  This expenditure shift, from saving to cruising and other retiree-type expenditures, may decrease the amount of capital available to private equity.  This is unsurprising given that the Booomer generation has the largest amount of capital in private equity investments.

Second, the pending importance of Generation X is somewhat risky.  If Generation Xers can be as productive as Booomers, then demand for private equity products are likely to continue to increase.  If, on the other hand, Generation Xers are not as productive as Boomers, private equity prospects and funding mix may shift increasingly away from the U.S.

Third, the drop in the birth rate for Post Millennials is likely to affect long-term economic growth.  It’s completely unsurprising that in the United States the fastest growing states are states with the highest birth rates.  Children bring economic growth, including on a per capita basis.  Should the Post Millennials continue to reduce their demand for children, growth opportunities may shift overseas.

Conclusion

Overall, demographic shifts are likely to impact the financial world.

Among the effects are a shift in available capital for private equity investments (all other things equal), a potential shift in productivity with the rise in Generation Xers, and challenges in long-term growth prospects if Post Millenials continue to forgo demand for children.