By David G. Barry
The amount of dry powder that the buyout industry has at its
disposal fell in 2021 for the first time since 2012.
That trend, however, is not looking like it will continue. According to
industry tracker Preqin, the buyout industry as of June 1 had $873
billion of dry powder – capital that has been committed by investors but not
yet allocated to deals. That’s up from $870 billion that the industry had at
the end of 2021. Overall, Preqin estimates that the investment industry –
excluding venture capital – has $1.86 trillion – up 3% from the $1.81 trillion
it had in December 2021. The buyout industry in 2021 saw its first decline in
dry powder since 2012 as it fell $39 billion from its all-time high in 2020 of
$909 billion.
Kebelyn Lee, assistant vice president research insights for Preqin, said
the drop in dry powder in 2021 was the result of “stronger growth” in buyout
deal activities compared with buyout fund-raising growth. In fact, during the
year, the value of deals done by buyout firms was a record $850.6 billion. In
contrast, buyout firms raised $364.1 billion – an increase over the $307
billion done in 2020 but down from the $403 billon raised in 2019.
However, Lee said that while fundraising in the first part of 2022 has slowed,
deal activity has as well. That, in turn, sets the stage for an increase in dry
powder for at least the first half of the year and possibly the end of 2022, he said.
Through
the end of May, Preqin said that firms have raised $92.1 billion. The firm is
projecting for the first half of 2022, the industry will raise $110.5 billion
and that for the year, the total will be $221 billion – which would be the
lowest fundraising year since 2015. On the deal side, Preqin said that the
value of deals done as of June 1 was $303.6 billion. It is projecting that the
value of deals done for the first half will be $364.3 billion and the year will
be $728.6 billion – which would be down from 2021 but would still be the
second-largest total.
The amount of dry powder that the industry has is noteworthy for several
reasons.
First, it shows that the industry is well funded and could survive for some
time if fundraising were to become increasingly difficult. But it also should
be noted, limited partners have entrusted PE firms with capital to invest – not
so it can be kept on the sidelines. This, in turn, means that firms with large
amounts of dry powder are under pressure to deploy it.
The amount of dry powder also sends a signal to institutional investors that
they need to proceed cautiously with new fund investments. They have, after
all, needed to come up with the capital to fulfill past fund commitments.
Pitchbook, another industry tracker, estimated that the
largest 25 firms hold 25% of uninvested capital and that half of the capital
was raised in 2019 or later. Blackstone, for instance, said it had $139
billion at the end of the first quarter – $67.2 billion of which was in private
equity. KKR, meanwhile, said it had $115 billion of dry powder in the
first quarter, up 66% from the $69 billion it had a year prior. Apollo said
it had $48 billion of dry powder — $17 billion of which was in its private
equity portfolio.
KKR Co-CEO Scott Nuttall does not see the
amount of dry powder in the marketplace as a negative. Speaking at the Alliance
Bernstein 38th Annual Strategic Decisions Conference 2022, Nuttall was
quoted as saying the purchasing power of dry powder “has gone down, because
leverage has gone down over the last 30 years.” He said that private equity today
can buy a “diminishing number” of S&P companies and at the same time Europe
and Asia have become big alternative markets. As a result, he said that “as a
percentage of the overall opportunity, alternative asset management is not that
big. So, yes there’s a good amount of dry powder, relative to what we used to
have, but relative to the opportunity set, we are still short capital and long
opportunity.”