The ‘dry powder’ cash reserves at private equity and venture capital firms continued to fall this year, according to the latest data, which could raises concerns for investors and directors hoping to sell up to deep-pocketed buyers.
Unspent money in the bank accounts of PE and VC firms “looks to be on the decline,” said Pitchbook in its new global private markets fundraising report.
After hitting a peak of US$3.7trn in 2020, the amount of dry power has declined 13% in the two years since, according to Pitchbook, with a fall of more than 8% in 2021 and by the end of the second quarter of 2022 had fallen another 5.9%.
PE funds, real estate and real assets funds saw dry powder
Usually, a smaller pile of dry powder makes life more difficult for companies looking for a takeover or management buyout, but makes life a little easier for PE and VC firms looking to buy.
The addition into the mix this year and next of higher interest rates makes things more difficult for private capital investors, which like to use debt to finance their deals and have particularly benefitted from rock-bottom interest rates since the 2008 global financial crisis.
However, fear not, there is still a “plethora” of dry powder, Pitchbook analyst Anikka Villegas said.
Dry powder still stood at US$3.2trn at the end of June, with PE funds having access to US$1.2trn of unspent funds and VC firms bucking the trend as cash levels inched up to US$562.4bn from US$540.3bn.
What’s more, funds that raised cash in 2017 and before still have billions of dollars and, Villegas said, “are now highly motivated to find uses for their uncalled capital”.
This is based on investment periods usually lasting around five years, with most fund managers aiming to invest all of their committed capital.
PE funds have invested their cash down more quickly than other strategies and still have US$111.4bn sitting in the bank in 2015 to 2017 vintages which the analyst suggested would need to be invested soon as the fund managers “may not be able to wait for market conditions to steady”.
A greater proportion of dry powder was sitting in larger, US$1bn-plus funds, the data showed, with Villegas saying that was due to investors favouring larger funds from more experienced managers.
“An implication of this is that PE investors will seek large targets to put that money to work.
“This will likely lead them to the public markets in search of attractive candidates for take-privates, especially as prices have been depressed by the bear market.”
Recent deals
Following private equity takeovers of Morrisons, Asda, Stock Spirits, Cobham and Clinigen in the past year, the market turmoil in recent months has not prevented (and may even have encouraged) takeover swoops for companies in London's FTSE 350 index.
In May power generator ContourGlobal PLC agreed to be taken private by Kohlberg Kravis Roberts for over US$6bn.
In the following weeks, Inclusive Capital Partners made a £1.5bn offer to privatise homebuilder Countryside Partnerships PLC (LSE:CSP), while public transport groups Stagecoach Group PLC (LSE:SGC) and FirstGroup PLC (LSE:FGP) also attracted bids.
This month, speculation about FTSE 100 company RS Group PLC being primed for a takeover gave a boost to the shares, while a company on the verge of blue-chip status, Homeserve PLC, is due to be taken private for over £4bn in a matter of weeks.
IPO impact
With dry powder increasing in VC firms, this is less likely to benefit sellers, unlike in other forms of private capital, as VCs more frequently exit investments through IPOs or trade sales, the analyst noted.
“With the onset of potentially recessionary conditions, VCs are more likely to seek quality assets better able to weather any upcoming storms, which could lead to high entry prices as the record dry powder focuses in on a smaller set of opportunities.
“Fund managers also have the ability to slow their investment pace should pricing become too unattractive.”