Private equity shops sitting on $1.2 trillion cash

LONDON • • With lots of money and a scarcity of deals, private equity firms' cash piles are the highest they have been since the depths of the financial crisis.

Then there is increasing competition from newly flush Chinese and pension fund bidders. Add to that low interest rates which lower borrowing costs and investors who want the funds they helped raise deployed. The combination makes the few assets in the market like chum in the water.

"With funds sitting on a lot of capital, there is often a feeding frenzy for attractive assets," said Kirkland & Ellis partner Neel Sachdev. "This could result in inflated prices and high multiples being paid."

The average premium buyout firms paid for acquisitions this year is about 31 per cent, an eight-year high, according to data compiled by Bloomberg. That could be a warning sign for buyout firms.

They will have to find a way to sell assets for more than they paid within a few years to satisfy investors who contributed to their investment pools.

Private equity shops are sitting on about US$862 billion (S$1.2 trillion) in dry powder, the cash they have raised but not yet deployed, according to data from researcher Preqin. That is up 14 per cent from last year and the highest level since at least 2008.

Meanwhile, total spending on mergers and acquisitions has fallen 13 per cent from last year, according to Bloomberg data.

"The supply-demand imbalance is pushing prices up to levels that are difficult to justify," said Mr Graham Elton, a partner at Bain. "To combat this, the best private equity firms are getting out well ahead of potential processes to increase their deal scrutiny."

Chinese bidders are becoming an increasingly active force in acquisitions in the US and Europe. Buyers from China have spent more than US$230 billion on overseas deals this year, data compiled by Bloomberg shows. That is already more than double last year's record-setting US$106 billion.Tougher IPO markets could be the thing that finally pushes valuations down, Mr Sachdev said.


A version of this article appeared in the print edition of The Straits Times on November 24, 2016, with the headline 'Private equity shops sitting on $1.2 trillion cash'. Subscribe