According to Preqin’s Fund Manager Profiles online service, as of April 2015 the estimated levels of global dry powder for all private equity strategies stands at a record $1.28tn. This vast amount of capital shows that the private equity industry continues to be able to raise funds successfully, as well as demonstrating its ability to collect for larger vehicles; the average fund sizes for all strategies in 2014 stands at $511mn, above the 2013 level of $478mn – this is the highest figure on record.
High levels of dry powder could be linked to the strong performance the asset class has shown recently, with LPs keen to commit their capital in return for high yields. Historically low interest rates and an abundance of LP capital point to this trend continuing. Currently, the firm with the largest amount of estimated private equity dry powder is Carlyle Group with $21.4bn available to invest, marginally ahead of Apollo’s $21.3bn. In fact, 12 firms are estimated to have over $10bn in private equity dry powder.
Despite fundraising success, excessive levels of dry powder can be problematic for LPs and may apply pressure to the traditional GP-LP relationship. Uninvested capital may not be considered favourable by LPs as the money is not being put to work and they may still be charged a management fee if this applies to uncommitted capital. It is in LPs’ interest for this capital to be invested, applying pressure to the GP to get the capital deployed.
Increasingly high valuations pose a risk for LPs seeking the high returns that private equity can offer. Record levels of dry powder that need to be invested will cause an upward pressure on prices, especially in favourable industries that are demonstrating strong growth and potential. With concern surrounding GPs possibly overpaying for portfolio companies, the likelihood of higher returns begins to fall. Preqin’s data shows that the average size of private equity-backed buyout deals is starting to pick up: in 2014 the average size was $95mn, rising from $77mn in 2010. Even though deal sizes seem to be increasing, they remain some way off pre-crash levels, with 2007 producing average buyout deals of $186mn.
In an effort to correct these issues there has been a notable increase in the number of non-traditional investment arrangements. It is likely that moving forwards, we will see LPs wanting to take more control of their investments, through co-investments, co-sponsorships, separate account mandates and even direct investing. Nonetheless, private equity’s overall ability to attract investor capital continues to be strong and the asset class remains an important part of an LP’s portfolio.