California and Massachusetts ranked first and second among US states with the highest private equity and venture capital penetration rate, according to S&P Global Market Intelligence data.
The criteria measures the proportion of private equity-backed enterprises in relation to the total number of private companies in a given state. A higher percentage suggests a state with an innovative business climate and vibrant startup ecosystem.
California's private sector comprises 263,297 companies, the highest count among states included in the study. Out of that total, 18,382 were shown to have private equity or venture capital backing, reflecting a penetration rate of 6.98%.
Massachusetts, on the other hand, is home to 3,389 private equity-backed companies out of 54,821 private enterprises, equating to a 6.18% penetration rate.
The US has an overall penetration rate of 3.47%.
– Download a spreadsheet with data featured in this article.
– Read about the private equity penetration rate in Europe.
– Read about private equity penetration in Asia-Pacific, the Middle East and Africa, and Latin America and the Caribbean.
Strong technology communities
Private equity and venture capital investors hunt for companies with potential to deliver disruptive impact and huge returns, and most of those companies are in the world of technology, said Conor Moore, national venture capital co-leader at KPMG in the US. California, Massachusetts and New York are home to strong technology communities as a result of the technology talent produced from their universities, Moore said.
"Usually where new companies or growth-related companies pop up are near universities and their network of startups, incubators and access to money. So, the states with good universities with good funding surrounded by conducive political and economic institutions will be on the top of the list for private equity investments," IBISWorld Inc. analyst Cesar Maldonado told Market Intelligence in an emailed statement. IBISWorld provides research and insights on various industries.
"In California, the networks between and surrounding Stanford University and Silicon Valley create a rich breeding ground for startups and incubators for new tech companies," Maldonado said.
Massachusetts, especially the Boston area, is boosted by its many universities and ecosystem of biotechnology and pharmaceutical businesses.
"The concentration of universities increases the chances a group of bright students will establish a startup that can be profitable and have lots of growth. The presence of the biotech and pharmaceutical networks also increases the chance of a new drug or an invention that will change peoples lives but also make tons of money," Maldonado said.
After COVID-19, some businesses moved to other places like Florida and Texas. Still, California is expected to remain the most active region for private equity and venture capital investments, Moore said.
Top sector
Technology, media & telecommunications is the leading sector by volume of companies with private equity backing at over 27,000, or 43% of all the more than 62,000 private equity-backed businesses in the US. Healthcare and consumer followed, accounting for 17% and 14% of the volume, respectively.
