Where Will PE Funds Invest Their Cash Holdings?


December 19, 2013

We recently looked at the level of private equity (PE) capital that had not been invested in 2013. Although reported figures from Thomson Reuters and the UK Financial Times have the “dry powder” at a value approaching $800billion, within the PE marketplace analysts and commentators are talking of a “real” figure being nearer to $1trillion.


While fundraising has picked up over the last two years, meaning a large chunk of this can be sat on until attractive deals raise their head, large sums of cash placed into funds in 2007/2008 will soon need to be repaid to investors if it has not been committed.


The reasons for PE funds sitting on their cash is well documented – they are only interested in the best deals – but where should they look if they are unable to get extensions to the funds they are holding and believe they have to invest?


Is Asia Worth It?
Although many commentators speak of a power shift from West to East in terms of the overall global economy, there are still question marks over whether Asia is really that attractive from a PE perspective.


While there are definite opportunities in terms of growth, the structure of certain markets and companies, particularly in China where the biggest opportunities are available, can make it difficult to see the whole investment cycle through to conclusion, particularly concerning exits, which have historically proven difficult in the Far East.


Nevertheless, the continued strong growth of almost all industries in the largest and wealthiest Asian nations means there is still an opportunity to see lucrative returns. Any PE firms investing in Asian business today will be heartened by current market reforms being pushed through in several countries to remove problematic processes that put off many investors.


The European Opportunity
There are many factors driving investment towards Europe, not least the fact that many Asian fund managers are looking away from their own continent and seeking out European opportunities instead.


However, the real buzz in Europe is the emergence of the continent as an exciting technology start-up hub, with the German capital Berlin serving as one of the best places for seeking out investment. Asian funds who would alternatively prefer to be seen to be looking for “local” investment opportunities could also choose Israel, which is second only to the United States for prominence of tech start-ups.


South America & Africa
PE funds looking to these two continents are best served seeking out specific opportunities in certain countries. Brazil is still the biggest PE opportunity in South America, while in Africa capital cities that are looking to become continental economic hubs, such as Nairobi in Kenya, offer the most diverse range of potential investments given the widespread development work relating to infrastructure and systems.
Ultimately, where PE firms choose to invest will come down to their existing portfolio and how they work in terms of managing risk, as well as any conditions they are locked into relating to the raising of capital. However, there are still numerous opportunities available for PE firms that want to avoid damaging their reputation by giving money back that has not been invested. If anything, a potentially large number of high value investments in early 2014 could prove a welcome boost for the global economy in general, given the historic link between PE success and overall economic performance.

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