If there’s any sector of the global economy that’s changed since the onset of the global financial crisis in 2008, it’s the financial industry. The industry, often blamed as part of the root cause of the global malaise, has grown and shifted attention (sometimes) quite dramatically over the past eights years.
Of the many sectors within the financial industry, perhaps no sector has gone through such large shifts as the private equity industry. In recent years, we’ve seen a flurry of activity of private equity companies into areas that traditionally have received little attention from the prestigious investment firms. Here’s a look.
Source: Quandl, GraphIQ
Water
Suppose one warm summer afternoon you get thirsty, and decide to take a drink out of the faucet in your home. Surprisingly, this water – traditionally provided by your local government – could be from a private equity company, such as is the case in Apple Valley.
Essentially, private equity firms are clever bargain hunters. Money is made by buying businesses considered to be under-performing, then looking to maximize profits and eventually sell the business off at a profit.
Roads, Bridges, and Highways
Up until recently, private equity has traditionally stayed clear of services, instead opting for companies doing technology or operating in hard industry. That’s shifted in recent years. Now, in addition to the traditional sectors, private equity is looking for bargains in the service arena, including areas typically dominated by local governments.
Water delivery is one of many areas private equity is looking into. Another is roads, bridges, and highways.
As an example, consider the Port of Miami tunnel in Florida. The tunnel is designed to avoid downtown Miami. Instead of bonding for the project through a potentially controversial bond issue, the State of Florida opted to hire Bouygues Civil Works to incur the upfront financing and building risks. The State only pays once certain milestones are accomplished.
Prisons
It is, of course, not just water and transportation that’s getting attention from the private equity industry. Such things as prisons are drawing interest.
Case in point is the Public-Private partnership pioneered in Virginia two decades ago. The prison, costing $42 million to construct, was built more efficiently and less costly because of the State’s decision to use private money for a public project.
According to Virginia officials, the State saved 15 to 20 percent by using a public-private partnership as opposed to building the prison themselves.
Other Areas
The foray of private equity into traditionally public goods doesn’t stop at water, roads, highways, and prisons. Private equity is moving into such things as parking garages, trains, and various other potentially profitable endeavors.
For instance, a very large private equity firm, Fortress Investment Group, is promising to build a rail line that can transport people from Miami to Orlando faster than anything currently available. The line plans to operate 32 trains per day, making four stops each day.
Conclusion
A lot has happened over the past eight years. In the financial world, one of the bigger shifts is the massive expansion of private equity into our daily lives. From water, to toilet paper, to trains, to roads, and many other facets of our lives, private equity has begun to wedge itself into the equation.
The industry sees profit to be made from previously under-performing companies (or governments). Whether that turns out to be the case is yet to be seen.
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