A few weeks ago, PitchBook, a leading research organization focusing on the ongoing analysis of the venture capital (VC) and private equity (PE) industries, released its latest update on how much capital PE firms have at their disposal via commitments from their limited partners.
Even after a record M&A year in 2015, the PE “overhang,” or “dry powder,” continued to grow in 2015. You can see this clearly in the following PitchBook chart:
It is important to note that the LP reporting cycle is two quarters behind the most recent quarter’s end. PitchBook’s most recent fund returns data is through 2Q 2015. 2H 2015 and 2016 numbers are from vehicles that have begun reporting yet have not fully closed.
However, despite that lag time, the PitchBook data historically has proven to be the most reliable source of information on the growth in capital committed to PE firms. As you can see from the chart, in 2015 the overhang surpassed the last record high in 2007, reaching $543 billion.
This is really good news if you are the owner of a U.S.-based middle-market business. Why? Because the commitments from LPs usually have specific timeframes attached to them. Typically the funds have to be used within 3-5 years of the commitment. So as you can see from the chart above, the significant amounts raised in 2011, 2012, and 2013 will need to be invested soon, most likely in 2016 and 2017.
Given the sheer amount of money at their disposal, it will be tough for PE firms to invest all of these funds in the timeframe required. However, keep in mind that PE firms are loath to return any committed capital to their LPs. These firms exist for one reason – to generate ample returns for their investors – and that does not happen until the capital is deployed.
So we anticipate continued strong demand for add-ons and platform companies from these investment firms through the end of 2017 at least. Perhaps longer, given the internal rate of return that LPs earn from equity investments in companies is typically far greater than other investment vehicles they have at their disposal.
What does this mean to the business community? As we have been saying for some time now, the current seller’s market will eventually terminate. History has shown that they always do eventually. However, the window is wide open for any well run firm right now to close a deal with an optimal buyer. Will it be a PE firm? Not necessarily. Professional buyers with these groups have specific targets they are looking for in terms of industry, location, size, management team, client concentration, and owner dependence.
Your goal, should you proceed into the market with your opportunity, is to create what we call a “limited auction,” where you get multiple buyer interest from sources not only in the PE community but also from corporate buyers, family offices, high-net-worth individuals, etc.
Time and space do not allow me to delve deeply into how you create this auction. If you own a business and are interested in learning more, set aside a few hours and attend a Generational Equity exit planning seminar. One of the many topics we cover is how to attract a larger buyer pool when marketing your company.
Our special thanks to PitchBook for once again highlighting a very important trend that every business owner needs to be aware of: the growing PE overhang!
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2016 Generational Equity, LLC. All Rights Reserved.
The information we learn from customers helps us personalize and continually improve your experience at gencm.com. Here are the types of information we gather.
Information You Give Us: We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice. Our computer system protects personal information using advanced firewall technology.
Information from Other Sources: For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Capital Markets LLC may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Capital Markets, L.L.C. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Capital Markets LLC at is office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
INFORMATION ON THIS WEB SITE IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Capital Markets may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Capital Markets does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Capital Markets will be deemed NOT to be confidential. By sending Generational Capital Markets any information or material, you grant Generational Capital Markets an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Capital Markets is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Information Generational Capital Markets publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Capital Markets intends to announce such products, programs or services in your country. Consult a Generational Capital Markets representative for information regarding the products, programs and services which may be available to you.
Generational Capital Markets makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Capital Markets web site, please understand that it is independent from Generational Capital Markets, and that Generational Capital Markets has no control over the content on that web site. In addition, a link to a non-Generational Capital Markets web site does not mean that Generational Capital Markets endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Capital Markets BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Capital Markets.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.