Where will private equity aim its $9tn money hose?
‘Use it or lose it’
Private capital firms are sitting on an ungodly amount of capital, after mammoth fundraising in 2020–21 and little investment in subsequent years.
Late last year, Preqin estimated the amount of “dry powder” at over $4tn, almost a third of the entire private capital industry’s total assets under management. As Alphaville wrote in May, the industry has now raised more money from investors than it has returned for six straight years, for a gap of ca $1.6tn.
Morgan Stanley analysts reckon the pile of proverbial dry powder has now grown to about $4.5tn — which, with leverage, means they are sitting on about $9tn of buying power — and that this will need to be actually invested soon:
Time to deploy (dry powder relative to annual deployment) has extended to ~3 years, the highest since 2013 and above the levels we’ve seen over the last 5 years at ~2.4 years to deploy. Given large fundraises in 2020-21, and limited deployment over the last 2-years, we now see an aging cash pile of private equity dry powder that in some cases may begin to no longer generate economics unless deployed, hence driving an urge to transact.
This was a bit of a theme on some second-quarter conference calls in the industry as well, with Partners Group CEO David Layton noting that “you use it or lose it within a certain period of time”.
But where? Most of the money is in private equity funds, and despite the prayers of investment bankers activity remains muted. By dollar value, PE-backed M&A was up 32 per cent year-on-year in the first half of 2024, but relative to history and the industry’s growing size it remains weak.
And by number of deals activity is continuing to contract. If you discount the first half 2020 — because, well, obvs — we saw the fewest number of deals in the past six months of 2023 and first six months of 2024 since 2017.
Unfortunately, Morgan Stanley doesn’t really have anything actionable to say about where this money is going to get sprayed, only observing that private credit opportunities, refinancing of existing deals, opportunistic “dislocations” and sexy themes like green energy and AI will get attention.
Here are the bank’s “key deployment themes”:
1. Expand across the private credit spectrum. Alts mgrs continue to step into the lender friendly backdrop with attractive risk/rewards. Opportunities span beyond sponsor-backed lending, CLOs and into asset-backed finance, varying forms of bank partnerships and more. We continue to see opportunities emerging with banks from asset portfolio sales, regulatory capital trades, and forward flow arrangements.2. Bring liquidity and flexible capital solutions. We see alts mgrs remaining nimble to bring a range of liquidity solutions (i.e. LP/GP-led secondaries, continuation vehicles, hybrid capital) to market given limited distributions and realizations. Refinancing demand is also high, with mgrs providing structured solutions to refinance and provide a bridge to when rates decline.3. Step into selective pockets of dislocation. Alts mgrs are selectively stepping in areas of dislocation that presents compelling valuation, particularly across a challenged real estate asset class. Some point to near-bottoming real estate values which present opportunities to buy into themes like warehouses, student housing, residential rental, logistics, European real estate, etc. Global Foundation4. Lean into high conviction LT themes and markets undergoing structural change. Secular themes (i.e., energy transition, data centers, logistics, AI, digital infrastructure) with resilient growth profiles and long-term tailwinds are in focus. As markets are undergoing structural change, such as in Japan that’s exiting decades of deflation, seeing greater risk appetite and greater shareholder activism. This is incentivizing corporates to re-evaluate their strategic options and portfolio of businesses and may catalyze divestitures of non core businesses as well as take-privates of public companies
In other words: ¯\_ (ツ)_/¯
But pretty much everyone agrees that the current situation — where private capital funds keep trying to raise new funds but are not deploying their existing capital, realising many of their investments or handing returns back to investors — can’t go on for much longer.
Morgan Stanley’s own CEO Ted Pick talked about this in the bank’s earnings call on Tuesday, noting that:
. . . there’s just been so much activity that has been suppressed by any kind of measure percentage of asset, stock, percentage of market cap. And the stickiness that we’re seeing in the sponsor community, too, needs to unglue. There is an enormous, as you know, multitrillion-dollar stockpile between the two sides of — sitting on inventory that needs to be released and then dry powder that’s been raised.
Given the scale of money that might be deployed when things eventually ‘unglue’, the only people happier than investment bankers might be financial journalists who adore a dumb deal.