Triago: Record level of dry powder to expire

The clock is ticking for private equity fund managers with capital to invest.

Roughly 10 percent of total dry powder – an estimated $14.5 billion – is expected to reach the end of its investment period in 2013 without being invested, according to placement agent and secondaries advisor Triago. While approximately 5 percent of dry powder typically expires every year, Triago is forecasting that twice the historic average will “reach term without being invested if purchases continue at their current pace”, the firm said in a quarterly report. 

Uninvested capital returned to limited partners will likely find its way back into general partners’ hands, however, and could help drive an 18 percent increase in fundraising from $270 billion in 2012 to $318 billion this year, according to Triago.

“The expectation is that the vast majority will indeed be reinvested in private equity, especially given that a lot of pension funds are increasing their allocations,” Triago founder and chairman Antoine Drean told Private Equity International.

Large US pension funds that allocated an average of 8.3 percent of assets under management to private equity in 2012 are expected to increase allocations to 9.7 percent in 2013, according to consulting firm Bain and Company.

Secondary market activity is also expected to increase this year as more GPs use secondary sales to actively manage their portfolios.

“There was growing volume from endowments, foundations, pension funds, and pretty much all the players in private equity, with more doing portfolio pruning and active portfolio management via secondaries,” Drean said.

The record $26 billion of secondary activity observed in 2011 and again in 2012 could rise to $30 billion in 2013 thanks to “exceptionally attractive pricing” and “an unprecedented $62 billion in dry powder” allocated for secondaries, according to Triago. 

Direct secondary investments by non-traditional secondary buyers such as US pensions and large sovereign wealth funds is also on the rise and could contribute to a higher level of overall secondary volume in 2013, the firm said.

In 2012 China’s State Administration of Foreign Exchange agreed to buy a portfolio of private equity stakes owned by General Motors’ pension plan for somewhere between $1.5 billion and $2.5 billion, while Swedish life insurance company Länsförsäkringar completed the sale of a €1.5 billion private equity portfolio to two buyers: the Abu Dhabi Investment Council and Australian institutional investor QIC.

“You will see big deals done but they’re increasingly going to be secondary directs,” Drean said. “We’re really seeing this increase every quarter.”