One measure of how well the private equity (PE) marketplace is performing is the estimated level of funds left unspent at the end of each year. Since the height of the global financial crisis in 2008 and the recession that followed, the amount of cash left over at year-end has been steadily falling as confidence returned to investment markets.
However, the end of 2013 has seen the cash held figure rise once again, standing at $789billion. The equivalent figure in 2012 was reportedly around $704million. Both figures are from research by Prequin.
A better comparison to make is perhaps with 2007, when PE deal making activity reached an all-time high before the financial system collapsed. Then, $769billion was left in the bank at the end of the year, which isn’t a great difference in percentage terms from this years’ projection.
However, Thomson Reuters estimated PE deal value for the whole of 2007 to be $776billion, against a 2013 projection of $310billion. At the same time, Prequin did find that 2013 is set to be one of the highest ever fund raising years, with an estimated $279billion being raised.
Why is so much PE cash going unspent?
It is well known that the biggest consequence of the financial crisis was to make everyone, from the low-earning consumer to the multi-billion dollar corporation, and every individual and business in-between, more circumspect with their money.
In terms of PE markets, this translates into more PE funds, irrespective of whether they are looking at buyouts, mergers and acquisitions, or a simple VC investment, targeting the small proportion of truly high quality investment opportunities available.
Mario Giannini, of Hamilton Lane, recently told the Financial Times that the high cash pile was down to the overcrowding of PE markets, saying, “There is overcapacity, but there’s also discipline today on using that capacity.”
If one was to analyse all the PE deal making opportunities currently available, it would be unlikely that there was true overcrowding of the markets, but that this impression is given because the majority of the cash is concentrated towards one end of the market. Speculative punts are still not the attractive proposition they once were, meaning money is left in the bank.
It is good news, however, that many private equity funds do not have to return unspent funds to investors in great volume, meaning they are in a great position to invest when there is a sustained global economic recovery, which has shown signs of happening albeit without there being any real certainty and confidence.