4th
Private Equity “Golden Era”, Fast Forward 5 Years
Bloomberg News has an excellent round-up of recent figures of the private equity space: ‘Golden Era’ May Elude Private-Equity Investors as Prices Rise.
Private equity firms (especially the “mega funds” of $5 billion and above) have now significant amounts of money to invest, as in half a trillion dollar. These funds come with a “due date” on them: most funds were raised in 2005-2008 with an investment period of 4-5 years, meaning that this dry powder is going to “expire” in 2010-2012. Only invested funds will earn a 2% management fee when the investment period ends, which creates a perverse incentive to invest at any cost.
Finally there is a major supply and demand imbalance that is building up: when the time will come to realize these investments (made when funds needed to invest a lot of money) in 4-5 years, there won’t be as much “dry powder” floating around, given a 70% plunge in private equity fundraising that is now back at “new normal” levels of 2004.
As unlikely as it may seem, there is still a massive slack in the private equity industry (again, especially in the large LBO market) that will take another 4-5 years to work out.
