Hedge Funds

Private Equity’s Mountain of Dry Powder

Andrew Ross Sorkin|The New York Times

If the private equity business is in a coma, nobody seems to have told investors the news.

Warburg Pincus just closed a $15 billion buyout fund, $3 billion more than it had originally sought, making it the fourth-largest buyout pool in the United States, according to Private Equity Intelligence. The announcement is the latest sign that although private equity deals are scarce, institutional investors, pension funds and university endowments are still eagerly writing checks to private equity funds. And with fewer investment opportunities, a lot of this cash is building up.

Private Equity Intelligence calculates that buyout funds around the world currently have a combined $820 billion in uninvested capital. And there is another $290 billion in the pipeline.

That’s more than a trillion dollars of dry powder.

Buyout shops raised $82 billion in the first quarter of 2008, which is 28 percent more than what they raised at the same time last year, when private equity was basking in what some called its “Golden Age.”

Things aren’t so golden any more. The credit crunch has made banks unwilling to provide loans for leveraged buyouts, so it is much harder to put private equity cash to work. Private equity has invested just $73 billion in the first quarter of 2008, less than a third of the $234 billion announced during the same period last year.

As the funding backlog has grown, Madison Dearborn, Blackstone and others have delayed the closing of their latest funds.

But many buyout shops are still taking investors’ checks with glee. Apax Partners and Goldman Sachs closed enormous new funds this quarter worth $18.2 billion and $15 billion, respectively. In its recently filed prospectus, Apollo Management said it had raised $12.5 billion for its latest fund, which has a target of $15 billion.

All that cash has got to go somewhere. Private equity barons only get paid when the money is out the door. Many have decided to enter the public market — with mixed results. For example, Warburg Pincus’ investment in MBIA has lost more than half of its value since December.

With the potential for more than a trillion dollars in private equity cash sloshing about, expect more investments by private equity in public markets. But with little leverage available, it is hard to see how private equity shops can give their investors the stellar 20-percent-plus annual returns that they have come to expect.