In less than two decades, private equity companies have gained more power than ever before. Whereas in the mid-1990s they paid around 2-3 per cent of all investment banking fees, they have paid a record 32 per cent in 2014 so far. According to Dealogic, buyout companies are responsible for $6.5 billion of Wall Street’s $20.4 billion in US investment banking revenues. This beats the 24 per cent of the $36 billion recorded in 2007.
This increase in numbers should come as no surprise. Private equity firms like Kohlberg Kravis Roberts and the Blackstone Group have been competing for young talent with Wall Street banks like Goldman Sachs and Morgan Stanley. The former are offering junior bankers around $300,000 annually which is about double what a second-year banker may earn elsewhere.
This does come with a price as a Wall Street Oasis writer mentioned that private equity firms demand additional hours that go up to 136 hours on a seven-day period. However, the extra hours still have not dissuaded budding analysts, which is why investment banks exercise strict rules. Goldman, for instance, demands that juniors resign once they accept a job at a private equity firm.
Aside from getting their hands on new talent, major private equity companies are reaping the benefits of the easy money policies established by the Federal Reserve. Through them, they can refinance the deals they struck while the buyout market was at its strongest seven years ago. As a result, companies do not need to do big acquisitions this year to dominate Wall Street and can enjoy paying dividends to themselves instead.
Take for instance the Blackstone Group’s public offering of Hilton. After purchasing it in 2007, Blackstone made $230 million in fees. This made the private equity company the largest fee payer in 2013 after it handed over $880 million. Another example is Carlyle, which boosted its $696 million worth mainly through the $295 fees it made through one of its companies Numericable. Dealogic highlighted that Numericable went public at the end of 2013 before buying its rival French telecommunications group SFR, which is also one of the largest corporate fee payers.
Because of this shift in power, some investment banks have started coveting private equity clients. On the other hand, others are pressurizing U.S. policy makers to indefinitely delay a rule forcing them to sell investments in private equity and venture capital funds. However, no one is commenting on this change in events and no decision has been made as yet.