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Private Equity and Committed Capital – The Overhang Grows

By Generational Equity

PE overhang

A few weeks ago, PitchBook, a leading research organization focusing on the ongoing analysis of the venture capital (VC) and private equity (PE) industries, released its latest update on how much capital PE firms have at their disposal via commitments from their limited partners.

Even after a record M&A year in 2015, the PE “overhang,” or “dry powder,” continued to grow in 2015. You can see this clearly in the following PitchBook chart:

Source: PE and VC Fund Raising and Capital Overhang Report – 2015 Annual

It is important to note that the LP reporting cycle is two quarters behind the most recent quarter’s end. PitchBook’s most recent fund returns data is through 2Q 2015. 2H 2015 and 2016 numbers are from vehicles that have begun reporting yet have not fully closed.

However, despite that lag time, the PitchBook data historically has proven to be the most reliable source of information on the growth in capital committed to PE firms. As you can see from the chart, in 2015 the overhang surpassed the last record high in 2007, reaching $543 billion.

This is really good news if you are the owner of a U.S.-based middle-market business. Why? Because the commitments from LPs usually have specific timeframes attached to them. Typically the funds have to be used within 3-5 years of the commitment. So as you can see from the chart above, the significant amounts raised in 2011, 2012, and 2013 will need to be invested soon, most likely in 2016 and 2017.

Here’s the Challenge

Given the sheer amount of money at their disposal, it will be tough for PE firms to invest all of these funds in the timeframe required. However, keep in mind that PE firms are loath to return any committed capital to their LPs. These firms exist for one reason – to generate ample returns for their investors – and that does not happen until the capital is deployed.

So we anticipate continued strong demand for add-ons and platform companies from these investment firms through the end of 2017 at least. Perhaps longer, given the internal rate of return that LPs earn from equity investments in companies is typically far greater than other investment vehicles they have at their disposal.

What does this mean to the business community? As we have been saying for some time now, the current seller’s market will eventually terminate. History has shown that they always do eventually. However, the window is wide open for any well run firm right now to close a deal with an optimal buyer. Will it be a PE firm? Not necessarily. Professional buyers with these groups have specific targets they are looking for in terms of industry, location, size, management team, client concentration, and owner dependence.

Your goal, should you proceed into the market with your opportunity, is to create what we call a “limited auction,” where you get multiple buyer interest from sources not only in the PE community but also from corporate buyers, family offices, high-net-worth individuals, etc.

Time and space do not allow me to delve deeply into how you create this auction. If you own a business and are interested in learning more, set aside a few hours and attend a Generational Equity exit planning seminar. One of the many topics we cover is how to attract a larger buyer pool when marketing your company.

Our special thanks to PitchBook for once again highlighting a very important trend that every business owner needs to be aware of: the growing PE overhang!

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.




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