Goldman plays down ‘capital overhang’ fears

The “overhang” of uncalled private equity capital – estimated to be around $490 billion globally – will not lead to structural issues within the industry or inflated prices, according to Martin Hintze, a European managing director in Goldman Sachs’ principal investments area.

According to a State Street Private Equity Index estimate, there is currently around $490 billion in undrawn private equity commitments – “dry powder” – waiting to be deployed. This vast so-called “capital overhang” has prompted fears among some that private equity firms will be hurried to invest a large amount of capital, even if suitable opportunities to do so are limited.

Yes, it's a big number, and a few firms are under pressure to invest, but I don't think it's a widespread problem. Martin Hintze

When asked about these fears on stage at a conference in London on Friday, Hintze said: “This is a mid- to long-term investment business. Yes, [the capital overhang] is a big number, and a few firms are under pressure to invest, but I don’t think it’s a widespread problem,” he said, adding that private equity investors are a “pretty disciplined” group. It “will not lead to structural issues or inflated prices”, he said.

Goldman Sachs’ principal investment area manages some of the largest pools of private capital in the world, including a $20 billion private equity fund and a $13 billion mezzanine fund. Over the last 18 months the firm has been primarily focused on the debt side of the business, said Hintze, because it had been difficult to “prudently price equities”.

Hintze was talking at the London Business School’s sixth Annual Private Equity Conference. Next on the podium was John Bernstein, managing director of growth investment firm General Atlantic, who gave a more sobering assessment of the situation.

I think this is going to cause some issues. John Bernstein

Bernstein said the limited investment periods associated with10-year life funds a created “a huge misincentivisation for a number of ‘use-it-or-lose-it’ funds to spend money now”, he said. “I think this is going to cause some issues.”

He went on to cite research showing that transactions in 2010 were done at prices “higher than they have ever been” – on average 11 times EBITDA. He qualified this statistic as being partly due to the fact that in the current market only the best companies are being bought and sold, which is pushing up the average price paid. “Even so, pricing is very expensive,” he said.

Bernstein pointed to a number of other structural issues that were acting as “impediments to reform” of the private equity industry. The 10-year fund structure widely used by private equity firms allows weaker players to continue operating for a long time, regardless of performance, he said: “You want weak players to leave and the strong players to keep going.”