According to Harvard Professor Josh Lerner, “Private capital is a vital component to innovation’s overall impact on the world’s economy.”
This might be the case today, but just a few years ago, “it would have been very uncommon to find an official from the U.S. Agency for International Development (USAID) or any other development organization sitting in the New York offices of a multi-billion dollar private equity firm brainstorming ideas of how the U.S. government and the private sector could work together to bring electricity to millions of people,” according to a Brookings Institution study.
However, as the markets for private equity and venture capital have matured over the past decades, so has the understanding of their ability to grow businesses. The scope to which they can make a significant impact has broadened. What was just building a business, has transformed into building an economy.
This is especially evident in Africa where private equity investments are on the rise. In Sub-Saharan Africa, private capital investment has expanded 5x since the 2000s. In addition to increased volumes, private equity deals are proving to be profitable in the region with multiples at an estimated 8x over the course of the last decade.
“Equity investments can play an important role in resolving some of Africa’s most pressing development challenges: solving the financing constraints facing African firms; meeting unsatisfied demand for goods and services among the continent’s low-income households; and ushering in much needed structural transformation for Africa’s immature economies by improving firm competitiveness,” according to Brookings.
Interestingly, Bain finds investment in China is seeing even greater scale, especially in Research & Development: “PE-backed firms have increased R&D investments to incubate innovative growth. Measured as a percentage of revenue, PE-backed companies now spend almost twice as much on R&D than their publicly listed counterparts, demonstrating a sustained emphasis on innovation. PE investors work with portfolio companies to help them understand the pivotal role that innovation plays in powering growth. As Chinese companies build value, they help the nation achieve one of its public policy goals: establishing China as an innovative society.”
There is no denying that the global economy is maturing. However, it is imperative that capital continues to reach the necessary targets to inspire innovation and tackle some of the most significant challenges that remain. Professor Lerner and the Private Capital Research Institute, along with the Brookings Institution and GSV Capital, aim to further the understanding of private capital and its global economic impact. They will be hosting an event in Silicon Valley this April entitled, “Driving Growth with Big Ideas: Private Capital’s Role in Global Innovation.”