Dry Powder Private Equity investors have become more conservative fundraisers and disciplined buyers. The correlation between fundraising and deal activity has become much more stable in recent years. Additionally, the average and median PE fund sizes have dropped since 2013; both the average and median hit their lowest points in 1H since 2004. Though fund sizes are smaller, GPs are benefitting by spending less time on the fundraising trail. On average, PE funds that closed in the first half were in the market only 13.9 months from start to end.
The PE industry continues to sit on heavily inflated levels of dry powder, with nearly $534 billion of capital overhang committed to U.S. GPs as of the end of 4Q 2014. That being said, that sum does represent a decline from the massive $553 billion seen in 2013. Last year’s considerable PE activity doubtless helped whittle down that overhang significantly, yet as U.S. activity continues to slide gently down, that may change. Attractive investment opportunities are becoming increasingly difficult to close with strategic acquirers willing to pay hefty multiples to win bids, leaving GPs with plenty of cash to spend but few places to spend it. Fundraising continued to grow between 2010 and the end of 2013; however, capital spent to acquire distressed companies in the wake of the last financial crisis led to a fast-moving seller’s market in recent years, with new buyouts slowing a bit.
Meanwhile, capital from prior vintages has been distributed back to LPs, only to see it recycled back into some of the same GPs, with pensions and institutional investors looking to maintain allocations and replicate past PE returns. This combination of recent fundraising health and increasing competition has led to this steady plateau of overhang.
The landscape could change over the next 12 months, even if drivers of current overhang levels seem to be largely in place for now. It may not be a stretch to see PE activity potentially perk up if public markets were to experience a slide, moving comparable valuations lower and allowing GPs to deploy some of the dry powder they have stacked up. If that is the case, the overhang will decrease again, perhaps by even more than it did between 2013 and 2014.