Asset AllocationOctober 24, 2016

Private Equity Breaks More Records

Highest-ever aggregate payout to investors is accompanied by a new high in unused capital.

Reported by Featured Author

Dry powder hit another all-time high despite private equity funds returning a record $443 billion to investors in 2015, according to Preqin.

Cash allocated by investors but yet to be deployed rose sharply in the first nine months of the year, Preqin said, from $757 billion at the end of 2015 to $839 billion at the end of September 2016.

“The consequences of this ‘wall of capital,’ coupled with high asset pricing, are being seen in the difficulty many managers are reporting in finding attractive investment opportunities.”Despite this build-up of cash, investors and fund managers are keener than ever to put more money to work in the space. More than 1,800 funds were seeking to raise capital from investors at the end of the third quarter of 2016, Preqin reported, another record. This includes a Chinese venture capital fund seeking roughly $30 billion—if successful, it will be the biggest private equity fund ever raised.

Meanwhile, 56% of institutional investors polled by Preqin said they intended to increase their allocation to private equity, with just 7% saying they would decrease it.

However, Christopher Elvin, head of private equity products at Preqin, warned that the good times may not last much longer.

“This level of fundraising has contributed to a massive build-up of capital waiting to be deployed by fund managers, and the total dry powder available to the industry climbs ever higher,” Elvin said. “The consequences of this ‘wall of capital,’ coupled with high asset pricing, are being seen in the difficulty many managers are reporting in finding attractive investment opportunities. Ultimately, it may be that these factors result in the net capital flow to investors in the coming year being lower than has been seen in recent years.”

Several high-profile investors have “downgraded the projected performance of their private equity commitments” due to high valuations, according to Preqin’s report.

In contrast to the long-term trends, in the third quarter of 2016 private equity managers raised an aggregate $62 billion—the lowest quarterly fundraising total since Q3 2013, Preqin said. More than a third of this total—$22.2 billion—was raised by the five largest fund closes.