The abundance of private equity dry powder – more than $1.1 trillion as of the first half of this year – makes it more challenging than it has ever been for fund managers to deliver returns.
This backdrop means private equity is bowing under the weight of its own success, according to law firm Dechert’s 2019 Global Private Equity Report.
“Today’s crowded, rising market means that buyout multiples remain stubbornly high, making the deployment of capital at fund managers’ disposal a persistent challenge,” the report noted.
As a result fund managers are being forced to think more creatively about deal structures, zoom into sector specialisation and consolidate with their peers to build scale.
The goal is to “maximise” assets under management, Markus Bolsinger, a partner in Dechert’s New York and Munich offices, wrote. “There are synergies by having that all under one roof. You have a more sophisticated fundraising system, the back office is rationalised and expertise is shared. More assets under management also means more dry powder,” he added.
An example is KKR teaming up with debt investment company FS Investments in April to pool more than $18 billion in private capital to invest in mid-sized businesses. The deal expanded KKR credit’s assets under management by 33 percent to $55 billion.
Almost all the respondents in Dechert’s survey of 100 senior-level executives in established private equity firms expect consolidation among fund managers to increase over the next two years. More than two-thirds think the increase will be “rather substantial”.
Another trend in the market is the growing popularity of long-hold funds, a strategy employed recently by firms including Blackstone, the Carlyle Group and CVC Capital Partners. More than one-quarter of respondents said they had already established a long-hold fund and nearly one-third were considering it.
With multiples continuing to climb, GPs are facing challenges when attempting to secure financing: 46 percent of respondents said they faced difficulty obtaining sufficient leverage to pay high multiples, and 41 percent said borrowing terms were gradually tightening across the board.
The report polled executives at firms with at least $500 million in assets under management based in North America (50 percent), EMEA (40 percent), and Asia-Pacific (10 percent).