As it turns out, the private equity industry is huge in Indiana and throughout the rest of the United States. Recent data suggests it makes up about 5% of the country’s GDP and supports about 26 million jobs. And on the state level, private equity also makes a substantial economic impact and supports hundreds of thousands of jobs, highlighting a frequently overlooked but significant part of the Indiana business portfolio.
Private equity companies make huge investments into other companies that are not publicly listed or traded on a public exchange, and often work to restructure or refresh companies in order to bring about a return on their investment. Typically, private equity firms consist of investors or other funds able to make high-net-worth, longer-term direct investments into other well-established firms.
Types of investments are often things like leveraged buyouts, growth equity, certain kinds of real estate investments, special debt, venture capital, and others. Note that venture capital differs in that it usually involves investments into younger companies, while private equity firms generally target mature ones. Venture capital is still technically private equity though.
Near the end of last year, the American Investment Council (AIC) published a report in conjunction with Ernst & Young (EY) a global professional services firm, about the overall economic impact of the private equity sector. AIC is a nonprofit made up of private investment firms that works to advocate for the industry.
EY’s data found the industry's impact is growing and already supports millions of jobs nationwide, both directly and indirectly. Specifically:
Altogether, the report stated that U.S. private equity now supports 5% of America’s gross domestic product (GDP) with a total economic impact of nearly $1.1 trillion.
There is also a large impact on the tax base of states and communities. In 2018, alone, the U.S. private equity sector paid $174 billion in federal, state, and local taxes. Approximately two-thirds of these were federal taxes ($113 billion) with the remaining taxes paid to state and local governments ($61 billion), according to EY.
When accounting for suppliers and consumer spending, the tax base was much higher. Overall, the federal, state, and local taxes paid by, and related to, the US private equity sector totaled nearly $500 billion in 2018.
“From helping rebuild America’s manufacturing base to supporting millions of good-paying jobs in industries from tech to hotels to transportation and trade, private equity is a driving force for economic growth and opportunity for our country’s economy and workers,” said Drew Maloney, AIC president and CEO.
The economic impact of the private equity industry on the Hoosier state is considerable. Interestingly, though our state has fewer employees than other states do, we have slightly higher than average wages. The report’s authors described several key points, including:
Additionally, the industry directly generated about $1.1 billion in state and local taxes in 2018. When combined with supplier and other ancillary activities, the total state and local taxes generated were $3.3 billion.
The AIC also provided another report late last year that showed how the industry makes a large positive impact on pension plans throughout the country. Essentially, private equity has usually performed better than other elections in retirement portfolios.
The report analyzed investment returns by 165 US public pension funds and highlighted how private equity continues to deliver the highest returns of any asset class. The study showed private equity continues to lead all asset classes in long-term investment performance, with a median 10-year annualized return of 10.2% that surpasses public equity’s 8.5% and real estate’s 4.8%.
Private equity is not often an industry one sees much about in terms of economic impact and employment-related activity, but it’s clearly important nonetheless. AIC and EY authors pointed out the value of the tax revenue created goes far when it comes to strengthening communities, schools, and municipal services, in addition to the benefits from thousands of quality careers. Over time as the industry grows, it will likely become an even more important part of Indiana’s business community, and one that will be worth watching as it does.
