Normally, any discussion about the huge amount of dry powder that buyout shops must invest makes me yawn. But the so-called overhang shrunk to $376 billion in December 2010, according to Cambridge Associates.
This is down about 12% from the $425 billion PE firms needed to put to work in late 2009, Cambridge says in a report, “Still Nursing the U.S. Private Equity Hangover.”
The decline is mainly due to large funds, those pools $5 billion or bigger, investing their money in 2010 and not fundraising, says Andrea Auerbach, a Cambridge Associates MD and head of the firm’s U.S. PE practice.
This situation may change in 2011. There are several large PE firms–think KKR, Apax Partners and Providence Equity Partners– that are out marketing, or expected to start, this year.
Any large funds raised this year will only add to the overhang, says Auerbach. An upturn in big deals could cut the overhang sharply, Cambridge said. But large deals, those that are $1 billion or bigger, are still scarce. From 1995 to 2010, only 17 big deals closed, on average, each year, Auerbach says (she cites Dealogic data).
By comparison, the buyout boon of 2006 and 2007 saw 57 large deals completed each year, she says.
PE-backed M&A has rebounded from the financial crisis of 2009 but transaction volume is nothing like the boom time of 2007, Auerbach says. There’s also been lots of talk that the credit markets can support a $10 billion LBO. However, such a large deal is yet to materialize.
It’s unclear what constitutes a typical M&A market and what transaction volume will be for large deals going forward, she says. “What is the new normal?” Auerbach says. ” It’s hard to know and that will definitely impact large funds. What if there aren’t any large deals? How do you change strategy to meet the new normal.”