Private Capital: The $22 Trillion Shadow Economy Challenging Wall Street

Top analysts at Bank of America Research are revealing the behind-the-scenes look at the colossal $22 trillion universe of private equity, an asset class so massive it would be “the second-largest economy in the world” if it were treated like a country. As the global financial landscape faces tectonic shifts, Bank of America Research’s latest thematic investing report reveals that private capital is reshaping the way companies, investors and economies think about growth, risk and control, challenging the primacy of public markets and opening new frontiers for both innovation and caution.

Private capital, defined by the bank as assets not available in public markets, includes private equity, private credit and real assets. It has multiplied at an impressive pace, more than doubling since 2012 to $22 trillion by 2024. This explosion has been driven by a shift away from public markets.

Since 2000, the number of companies listed in the US has halved to just over 4,000, even as the number of private companies backed by venture capital has grown 25-fold. Startups now remain private for an average of 16 years, a third longer than a decade ago, reflecting a broad shift toward private capital and away from public scrutiny and regulation.

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The world’s most transformative companies are not found on the stock market, argues BofA. Just as public markets have a “magnificent 7”, there is also a “privately held magnificent 7” of “hectocornios” [empresas avaliadas em valor 100 vezes maior que um unicórnio]each valued at $100 billion or more and growing. BofA’s Thematic Research team estimates that their combined valuations have soared nearly fivefold since 2023, reaching $1.4 trillion. They evaluated the 16 largest companies in the sector, representing US$1.5 trillion in value, a staggering 1% of global GDP. There are many other “decacorns” (valued at $10 billion or more) and unicorns below them on the list.

For investors, BofA found that the private equity notably outperformed the S&P 500 during this periodon average six percentage points per year. And there are other privacy benefits, the BofA analysts add: “In the time spent on financial regulatory paperwork each year, 12 Great Pyramids of Giza could be built.”

But as this asset class grows, financial experts warn that opacity creates risks, especially in relation to the $1 trillion to $3 trillion segment known as private credit. Public markets offer transparency, governance and liquidity; Private companies, on the other hand, often avoid periodic reporting and undergo less rigorous oversight. This lack of visibility can mask financial and governance risks, with analysts warning investors not to ignore the dangers in their quest for returns.

Wall Street’s “fear index” — the VIX — has risen more than 35% in the past month amid bankruptcies at subprime lender Tricolor Holdings and automotive supplier First Brands, both marred by allegations of fraud and losses, cutting $100 billion from the market capitalization of U.S. banks. JPMorgan CEO Jamie Dimon warned, “When you see one roach, there are probably more,” pointing to the dangers of hidden risks in private credit markets. In fact, Dimon has been sounding this warning since at least May, when he warned that non-bank credit is “untested in a recession,” suggesting that a flood of defaults could occur if a recession hits.

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Capital allocation: from public to private

Historically, public companies were seen as the best vehicles for capital efficiency. They offered liquid investments, transparent financial information and were accessible to everyone. However, private capital is rewriting the rules.

With fewer companies seeking IPOs, public markets are losing their central role in economic growth. At the same time, innovation and digitalization — driven by disruptors like — are increasingly fueled by private investors with great financial capacity. Since the launch of ChatGPT, BofA has found that Nvidia, Google, Microsoft and Amazon have invested in about half of the world’s 100 artificial intelligence (AI) unicorns.

The data center businesses that drive a significant portion of GDP growth are increasingly based on private credit. Meta, for example, secured a nearly $30 billion financing package for a data center in Louisiana, Bloomberg reported, adding that it is the largest private equity deal on record. The scale of spending in this sector is unprecedented, with OpenAI estimating that trillions in infrastructure will be needed to keep up with rapid technological demands.

In late October, Apollo Global Management chief economist Torsten Slok stated that private spending on data center construction was so massive that “there is basically no growth in corporate investment outside of AI right now.”

Even some beneficiaries of this movement are worried. OpenAI CEO Sam Altman drew parallels to the dot-com bubble, warning that “someone is going to get burned there” — especially since 95% of generative AI projects reportedly do not generate profits, according to widely reported MIT research. Analysts warn that investors could suffer losses if speculative bets on infrastructure outweigh actual utility or revenue, recalling lessons from the telecommunications sector’s glut in the early 2000s.

The first phase of building AI was largely peer-to-peer, but now bond investors and private credit lenders are providing two to three times more financing than the public markets. The “hyperscalers” [empresas que fornecem serviço de computação em nuvem em larga escala] Tech companies have turned to private credit for sustained, long-term loans, and commercial mortgage-backed securities linked to AI infrastructure reached $15.6 billion in August, JPMorgan estimated at the time.

Big deals now feature financing horizons of 20 to 30 years — extraordinary bets on technologies whose commercial viability five years from now is still uncertain. “We are conservative in our assessment of future cash flows because we don’t know what they will look like, there is no historical basis,” Ruth Yang, global head of private markets analysis at S&P Global Ratings, told Bloomberg in August.

Shawn Tully, who reports extensively on private credit for Fortune, highlighted a distinction between big players like Apollo, Ares and KKR, who are “pioneering a highly original strategy by extending credit they originate independently, often secured by high-yield assets, from railroad cars to data centers, that ‘lock in’ borrowers for several years.” Borrowers, in turn, are willing to pay much more in interest than in the traditional long and expensive investigation process that requires S&P and Fitch ratings, strict clauses and, sometimes, long deadlines.

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Two prominent industry executives, David Spreng of Runway Growth Capital and Ted Goldthorpe of BC Partners Credit, argued in a commentary for Fortune this month that private credit is not, in fact, a shadow monster, but “structured finance based on cash flow, enterprise value and downside protection.” Far from typical venture capital risk, they assert that many private debt vehicles are publicly listed or backed by institutions, while reporting audited financial statements and operating under legal and fiduciary obligations. Of course, they add, there are riskier parts of the market with looser standards, such as covenant-lite loans. [com cláusulas restritivas]aggressive structures or liquidity promises where the underlying assets are illiquid.

Earlier this month, Morgan Stanley Wealth Management CIO Lisa Shalett told Fortune she was particularly concerned about how much of the spending boom was driven by private credit. “Every morning, my Bloomberg home screen shows what’s happening with CDS spreads on Oracle’s debt,” she said, referring to credit default swaps, the financial instrument infamous for the role it played in the 2008 global financial crisis. “If people start to worry about Oracle’s ability to pay,” Shalett said, “that will be an early sign to us that people are getting nervous.”

The Long View: Opportunity Versus Oversight

The tectonic shift toward private investment has enormous implications for society. BofA analysts note that as private companies grow, they shape how technology develops, how jobs are created and how risks are managed. The 120 largest private unicorns now have a total valuation roughly equal to Germany’s market capitalization, signaling their disproportionate influence on the global stage.

Jim Rossman, global head of Barclays’ shareholder advisory group, has been following private assets with a special focus on hedge funds for decades on Wall Street, and sees a broader transformation taking place. “The growth of private equity is really a reflection of the fact that companies, particularly those like Apollo, Blackstone and TPG, are approaching trillion-dollar platforms,” he told Fortune in a recent interview, noting that some have acquired their own insurance companies and are growing beyond the traditional conception of an investment firm.

These companies are so flush with capital and assets, Rossman said, that he sees the private equity boom facilitating the growth of alternative platforms to the public markets. “You can see an era where private equity and private equity allow companies to stay private longer. And if 401(k) plans [plano de aposentadoria patrocinado por empresas] “And that would give exposure to a much broader part of the economy than just what is public.”

More generally, Rossman added, the world of finance is undergoing a lot of change. “I think there is a technological change, a generational change and ultimately structural change [que] may be the most important is the growth of investment in mutual funds.” Rather than seeing private equity as something shadowy and risky, Rossman argued that it is opening up more types of companies for investment, and that they are likely to grow, even transform, in ways that are surprising to many investors.

Rossman recalled buying his first mutual fund through a large asset manager in the late 1990s: “It cost 300 basis points, three percentage points to get in, and they selected 28 interesting technology companies… and then, oh, the management fee was two and a half, 250 basis points a year.” Today, he said, the index fund revolution has democratized access to the point where you can get the same fund for just 5, 15 or 25 basis points. “It’s just incredible.”

As the line between public and private capital becomes more blurred, the $22 trillion world of private capital is not just a financial story — it is indicative of how our economies, companies and innovations will be built and valued in the years to come. With private assets rivaling the size of national economies and the biggest names in technology betting big out of the public eye, leading analysts believe this revolution is just beginning.

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