There is a substantial amount of capital sitting on the sidelines waiting to be invested over the next several years, which you can see by looking at the amount of “dry powder” or “overhang” that exits in committed capital for equity firms to use for investing. Dry powder and overhang simply mean that firms have capital that is committed to them by their investors to use for and investments.
The amount of dry powder has grown steadily over the past few years as equity firms have been accumulating capital and delaying investments while waiting for recessionary pressures to subside. The capital they have raised needs to be invested over the next few years or the equity firms will be required to return the committed capital back to their investors. Since equity firms exist for one purpose – to invest the funds they are given – they are usually reluctant to return committed capital unless they have to. This means that, as the chart below shows, a substantial portion of the $477 billion accumulated will need to be put to work.
Cumulative Private Equity Overhang
The source of this chart and data is Pitchbook Data. PitchBook is an independent and impartial research firm dedicated to providing premium data, news, and analysis on the private equity industry. This is from their latest update on the PE overhang from May of 2011. Over the years we have found their data to be quite accurate and on point.
Even though the amount of dry powder sitting in the hands of equity firms has declined slightly due to recent acquisition activity, there is still a tremendous amount that needs to be invested. Since most funds have a limited window of two to five years to invest this committed capital – and since the bulk of this capital was raised in 2007-2010 – it is a safe bet that a significant portion of this overhang will need to be invested over the next couple of years. The chart already shows that this is happening. The overhang has dropped slightly from $521 billion to nearly $480 billion as of last September (this is the latest data available from Pitchbook).
So what does all this mean to you as an owner of a busted the myth that private equity firms only invest in billion-dollar deals. As equity firms become more active, they will continue to look towards the middle-market for deals. The key for you will be to ensure that your company is properly positioned to be of interest to an equity firm.? Are you aware that the vast majority of companies acquired by equity firms are middle-market companies? Earlier we
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