Capital overhang falls 28% since 2009

The dreaded ‘capital overhang’ –uncalled capital held by private equity funds, has declined to $324.7bn, but has the potential to spike again.

The amount of private equity firms’ unspent commitments has dropped since 2009, leveling at about $324.7 billion at the end of 2012, according to a new study from Cambridge Associates.
In 2009, capital overhang was $451 billion – a substantial wall of unclaimed capital that sparked fears of too much money chasing too few deals drives up prices potentially affecting fund performance.

However, the industry appears to have whittled the overhang down naturally, with firms through 2009 and 2010 spending money without raising much new capital. This brought the overhang down at the end of 2011 to around $344.4 billion. Each overhang is calculated based on the six-year period preceding the stated year.

Still, the low overhang numbers may not last for long. “The active fundraising environment could cause the overhang to crest again, particularly for larger funds,” Andrea Auerbach, managing director at Cambridge, said in a statement that accompanied the study’s results. 

“More capital means more upward pressure on prices for private investment opportunities,” Auerbach told Private Equity International. Higher capital overhang numbers can make things harder, she added.

Most of the capital deployed today is from the buyout era of 2006 through 2008, but today’s fundraising climate is improving, according to Auerbach.
“Roughly $700 billion was raised in the three bubble years alone. Right now in the overhang estimate, it appears one-third of overhang is from that era,” Auerbach said. As funds from those vintage years roll off, Auerbach is unsure whether fundraising will return to pre-2009 heights anytime soon.
By size, the overhang for funds over $5 billion was $133 billion at the end of 2012. Funds between $1 billion and $5 billion had a $122 billion overhang and funds less than $1 billion had overhangs of $70 billion, according to the report. 

Cambridge is also tracking another fundraising phenomenon, this one involving what it calls the ‘shadow overhang’ –referring to capital allocated to co-investments and direct investments from large institutional investors.
“The shadow overhang could potentially equal the traditional fund structure capital overhang amount,” Auerbach said. “We’re always looking over our shoulder at the shadow overhang.”