Money, they say, makes the world go around. So, this was the year many PE analysts expected it to stop turning; suggesting investor confidence was in rather short supply. And that – thanks to raging inflation and the war in Ukraine – the industry had grown cautious.
As Forbes put it, “Private Equity Managers may face increasing headwinds in 2023.”
But the naysayers may have overlooked one thing – the industry’s one trillion dollar ‘dry powder mountain.’
For the uninitiated, ‘dry powder’ is committed investor cash yet to be ‘called’ by investment managers and allocated to a specific investment.
And, as Grant Thornton PE expert, Melanie Krygier, comments: “We’ve seen, in combination, two stellar years of fundraising…that’s resulted in a ton of cash available in the PE ecosystem waiting to be deployed in transaction.”
Krygier cites PitchBook data to back her up: US PE funds raised $258.8 billion through the third quarter of the year. Short of the $366.1 billion raised in 2021. But figures that compare favourably with pre-pandemic fundraising.
As global consulting network RSM, point out, “The levels of private equity dry powder …are close to an all-time high, sitting at $1.24 trillion globally.”
$700 billion in the US alone. $250 billion in Europe. Tellingly, some 63% of that global pot has been raised since 2020. And this is key.
As RSM say, “considering that the typical ambition is to deploy funds within 3-5 years…the relative ‘youth’ of the pool will be reassuring to those involved in the private equity market.”
Because “there are strong incentives for private equity firms to deploy capital, rather than return it uninvested.” Good news then, for companies in need of cash.
So, where might all this ‘dry powder’ end up?
Forbes, citing JP Morgan analysis, predict “PE managers to uncover opportunities in digitalization, housing, healthcare, ESG (environmental, social, and governance), and cybersecurity.”
One trillion dollars in search of a new home. The PE world will keep on turning.