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Dry Powder in Private Equity: A Struggle to Spend or a Welcome Resource?
July 11, 2018
Dry powder is currently a hot topic within the private equity industry because the levels of dry powder are at a record high since the financial crisis, with over $1T of committed capital available.
It is the term used for the amount of cash reserves or liquid assets used by an investor for investment purposes, but has not yet been deployed and there are a number of reasons why there is an excess. In part, there are surplus cash reserves as a result of the strength of fundraising – more cash risen, more cash reserves. However, this is a tale of two halves as private equity has not been spending as much in previous years – asset prices have been inflating and private equity firms are reluctant to pay a premium for these assets. In fact, there has been a year-on-year decrease in private equity funding from 2015 to 2017.And this is where there could be a problem. The amount of dry powder is potentially dangerous within the industry, as both the private equity firm and investor miss out on returns if the money is spent too slowly but, at the same time, the private equity firm will not want to invest in a bad deal.
That being said, the amount of dry powder available could create potential opportunities. A record amount of dry powder means there is the cash to spend and this has fuelled an increase in multiples and, despite the decrease in the number of deals, larger transactions took place in 2017.
In fact, according to PitchBook, deal sizes are now at a post-crisis high, with the median deal size the highest since 2006 at €38.5M.
This is then the opportune time for a company that is looking to sell to do just that – the funds are there and if a company illustrates an increasing cash flow then a private equity firm is prepared to spend the money on a company that fits with their ideals.
WE ARE READY WHEN YOU ARE.
Call Benchmark International today if you are interested in an exit or growth strategy or if you are interested in acquiring.
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