Levels of private equity “dry powder”, the amount of unspent commitments to PE funds, have increased to $1.05trn during 2013 according to recent data from Preqin. This is up from $941bn last year and is the highest level since the 2008-09 period when dry powder levels hit c.$1.07trn. So what’s driving this, and what does it mean for shareholders who want to sell their businesses?
The main reason for the growth in dry powder levels is that, despite being behind in their investment schedules, PE houses have continued to raise money from investors. With many potential acquisition targets hit by the recession, there have been fewer opportunities for PE houses to invest in quality businesses and deal volumes have been down (albeit the tech sector has proved more resilient than other sectors). However, PE funds’ ability to return cash from previous funds through dividend recaps (see our previous commentary) and IPOs has allowed investors to recycle cash into the asset class and has driven renewed appetite from yield-hungry investors. This has enabled Carlyle, Warburg Pincus, Silver Lake, CVC Capital Partners and Advent International to raise new funds of more than $10bn each this year.
For shareholders, we’re seeing textbook supply and demand dynamics in action: a prolonged scarcity of quality businesses for sale has led to more competition amongst trade purchasers and financial investors, supporting higher valuations. In many cases, we’re seeing PE houses making attractive pre-emptive bids in an effort to avoid formal, competitive processes. We’re also seeing increasing numbers of US-based PE houses crossing the pond and setting up local offices in London to target acquisitions of “more affordable” UK and European businesses.
PE houses also now have improved financial backing from more buoyant credit markets. US lenders such as Silicon Valley Bank and Wells Fargo have opened offices in London and are focusing on tech deals, and even the traditional UK banks such as Barclays and NatWest have set up dedicated tech teams that understand the nuances of the sector, leading to more innovative funding structures.
These factors have been driving increased transaction volumes and values since earlier in 2013, and the last two quarters in particular have seen a marked increase in activity. We expect this to continue, and to accelerate, well into 2014.