Buyout Firms Face $400 Billion Overhang

DealBook.blog, June 3, 2009:
Private equity firms may be sitting on a record amount of dry powder, but that isn’t stopping them from continuing to stockpile for a future when deal-making comes back into fashion.
The private equity “overhang” — the difference capital raised and capital invested — stood at $400 billion as of April, an all-time high, according a report by the Alliance of Merger & Acquisition Advisors and PitchBook Data.
The capital backlog ballooned in 2008 when the credit crisis burst the buyout bubble, putting an end to the kind of high-flying deals that took Hilton Hotels and TXU private, but private equity firms kept racking up new capital commitments.
The mismatch between fund-raising and deal-making underscores the unsettled state of the industry. Buyout funds remain popular with investors, such as pension funds and institutions, but they have been distracted by troubled credit markets and problems at existing portfolio companies.
“This historic high of capital yet to be deployed by private equity creates a new deal paradigm and a challenge,” David Cohn, an A.M.&A.A. advisory board member and managing director at Mosaic Capital, said in a statement. “Deal-makers have to put down their pencils and dispense with historical spreadsheet analysis.”
Despite their bulging coffers, buyout shops haven’t slowed their fund-raising pace, according to The Deal. Private equity firms have raised about $30 billion in April alone, while fund-of-funds ponied up another $5.1 billion in fresh capital to invest over the past two months, the publication said, citing data from its Deal Pipeline.
So when will private equity firms start deploying the cash piling up in their war chests?
“The fourth quarter is going to tell the story,” Mr. Cohn predicted. “This summer is the time for a ‘boot camp’ for both private equity and intermediaries to refresh their deal flow and be prepared for the fall.”
Of course, private equity funds traditionally use two sources of funds to buy their portfolio companies: equity from their investors, and loans from banks. The latter is hard to come by these days.
So buyout chiefs may need to be creative as they seek to deploy the equity they’ve raised — at least, until banks turn the spigot back on again.
Go to Article from The Deal.com »
Go to Article from VentureBeat »
Go to Press Release from The Alliance of Merger & Acquisition Advisors and Pitchbook Data via BusinessWire »