The cumulative amount of private equity fundraising overhang in 2009 has reached an all-time high of USD400bn, according to the Alliance of Merger & Acquisition Advisors and private
The cumulative amount of private equity fundraising overhang in 2009 has reached an all-time high of USD400bn, according to the Alliance of Merger & Acquisition Advisors and private equity research firm PitchBook Data.
After record fundraising years in 2007 and 2008, the gap between funds raised and equity invested has widened to an aggregated level of USD400bn.
The capital overhang climbed by over USD141bn in 2008 as funds closed on record amounts of new capital and investment activity declined roughly 60 per cent due to the global economic slowdown.
‘This historic high of capital yet to be deployed by private equity creates a new deal paradigm and a challenge. Dealmakers have to put down their pencils and dispense with historical spreadsheet analysis,’ says David Cohn, AM&AA advisory board member and managing director of Mosaic Capital. ‘History now tells private equity little about the future. Investors need to scrutinize each opportunity to identify those companies that will survive this recession, realise future growth, and have the right management in place to get them there. Target companies will have to pass a more stringent stress test, which will be just as important as the multiples used. On the other side of the coin, investment bankers are going to have to be more skillful in guiding their clients towards more rational multiple goals."
John Gabbert, founder of PitchBook, adds: ‘The fact that private equity deal flow has dropped to a multiyear low is not due to a lack of capital available for investment, which remains at an all-time high. With USD400bn available for investment, there is currently enough dry powder to more than support the deal activity of 2004, 2005 and 2006 combined with the use of moderate leverage. Private equity firms continue to raise additional capital as well, with 18 new funds raising USD25bn in the last 60 days alone. As economic conditions continue to stabilise and the credit markets start to reopen, the private equity industry is poised to get back to deal making.’
