Private equity keeps $789 billion of powder dry
Private equity groups are holding more cash for acquisitions than they had at the height of the leveraged buyout boom, in spite of a fall in the volume of deals being done – raising concerns about overcapacity in the industry.
Data compiled by Preqin, the research group, show that the value of unspent commitments to private equity funds, known as "dry powder", has surged to $789bn this year – an increase of 12 per cent since December 2012, after four years of decline.
This compares with $769bn of unspent cash in 2007 – when the volume of private equity deals reached a peak – and the $829bn that went unspent in 2008, when deal volumes plunged 70 per cent as the financial crisis unfolded.
In 2007, private-equity houses led $776bn-worth of deals, but the comparable figure stands at just $310bn in 2013, according to Thomson Reuters.
According to research by Hamilton Lane, a private equity investor that tracks 2,000 funds, this combination of increased fundraising and decreased deal volume could lead to a record level of dry powder by the year end.
Buyout groups' rising cash piles reflect the fact that they have taken longer to invest their funds since the crisis, as they have found fewer good opportunities.
But the increase in the capital overhang has been largely fuelled by a renewed appetite for private equity funds from yield-starved institutional investors.
After a steep contraction in the aftermath of the crash, buyout groups have been able to raise more money from investors, partly because they have found ways to return cash from previous vehicles – mostly through refinancings and initial public offerings.
This has helped Advent International, WarburgPincus, CVC Capital Partners, Carlyle and Silver Lake raise more than $10bn each for new funds.
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According to Mario Giannini, Hamilton Lane's chief executive, 2013 is on course to become "the fourth biggest fundraising year" of all time for the private equity industry as investors are lured by its higher returns.
Private equity funds have attracted $279bn so far this year, more than the whole of last year, Preqin has found.
While this is still about 40 per cent less than in 2007 or 2008, private equity groups can also count on $200bn to $300bn of "unofficial" co-investment capital that backers have set aside to invest alongside their fund managers to save on fees, according to Mr Giannini.
Buyout fund managers charge 2 per cent on the capital pledged to their funds on average.
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Some industry participants warn that the cash overhang will drive asset prices up as groups feel the pressure to invest the money before the commitments expire, typically after five years.
"Prices are full in the US and in Europe for the good assets," said Bob Brown, the managing director in charge of investor relations at Advent. "There's more credit financing available, fundraising has recovered, investors are willing to spend more in co-investments and most private equity firms are behind their investment schedules."
However, Mr Giannini said the weak volume of deals demonstrated that groups were not yet rushing to put money to work.
"There is overcapacity, but there's also discipline today on using that capacity," he argued.
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