REPOST: Why Private Equity Has $963 Billion in Dry Powder

Investors are pouring money into private equity in hopes of solid yield. However, a large portion of that mountain of cash is yet to find its way to lucrative investment deals. More insights from this Bloomberg article:



Investors give private equity managers their capital with the expectation that they’ll make it grow. But today these managers are sitting on a record $963.3 billion of dry powder, as they call money that they’ve raised but have yet to invest. The size of that pile, and the fact that it keeps rising, is making everyone antsy. A little dry powder is great if managers are holding out for better deals. But a lot can make for overly itchy trigger fingers, or can start to make investors wonder if there are cheaper ways to do nothing with cash.

 1. Why is there so much uninvested cash?

 How much dry powder a firm has depends on both how much it’s raising and how much it’s investing. Right now, the first is up and the second is down. Investors are pouring money into private equity in search of yield, driving near-record fundraising levels and speeding up the pace of inflows. On the spending side, managers are having a harder time finding attractive deals since asset values are generally considered high. Buyout dealmaking perked up a bit in the second quarter but remained below last year’s pace.

 2. Why are there so few attractive deals?

 It’s a hard time to invest for even the most experienced investor. Stock markets are in a years-long bull market and hitting record highs. Asset values are generally seen as pricey on average. Some investors say that risky assets, such as junk bonds and emerging market debt, are overvalued. All of this comes amid uncertainty surrounding rising interest rates, heated geopolitics and a pervasive sense that the market could take a bad turn.

 3. Is lots of dry powder a bad thing?

 Some clients might think so. Investors pay private equity managers in expectation of better-than-average returns. The industry’s track record has translated into strong growth -- at the end of 2016, global assets under management totaled $2.58 trillion, according to Preqin Ltd. Having about a third sitting idle isn’t great for customers getting charged about a 2 percent fee on assets under management without much of an upside. Some managers have shifted to charging fees on invested capital only.

 Continue reading HERE.

"The opinions expressed in this re-posted article are not necessarily the views of LOM, but are presented to provide a broad spectrum on financial matters."

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