PE Funds Must Commit Billions As Investment Period Ends

Oct 17 2011 | 12:45pm ET

Private equity GPs that closed their funds in 2008 have a combined $204 billion in so-called ‘dry powder’ to invest from those vehicles, according to the latest industry report from Preqin.

Given that the average p.e. fund investment period is five years (with the exception of real estate funds), Preqin predicts GPs will be under considerable pressure to invest these remaining funds, both to avoid exercising clauses to extend the agreed investment period and to provide timely returns on capital.

The 1,308 funds that closed in 2008 raised a record $679 billion but Preqin says some have avoided investments completely until this year.

An estimated $937 billion in dry powder is available to private equity fund managers worldwide.

Of this, 41%—or $91.5 billion—is held by buyout funds; $41.9 billion by mega buyouts (those worth $4.5 billion or more). Mega buyouts, which rely heavily on debt financing, were particularly hard hit by the crisis, says Preqin, as credit dried up.

Capital call-ups for buyout funds fell to a four-year low in 2009, when just $107 billion was called up.

A higher proportion of deals completed recently have been add-on deals, suggesting that a number of GPs are looking to consolidate their existing portfolio companies.

“In comparison to the pre-crisis boom period, recent years have been characterized by private equity fund managers delaying their investments for longer than before. Due to the wider economic conditions and constriction of the deal market, managers are understandably showing more caution in deploying capital," said Preqin's Alex Jones.

“The fast-approaching end to their fund’s investment period is potentially a cause for concern for those GPs that have deferred deal making; however the availability of substantial levels of capital in reserve means that, should market conditions stabilize, the industry could see a repeat of the flurry of deals and exit activity that took place throughout 2010 as managers put this cash to work and realize their investments."


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