Private Equity Investors Have $740 Billion to Spend, Driving Valuations

Private equity investors have more capital at their disposal than at any time in more than a decade, which could boost prices for companies seeking acquisitions.

As of Aug. 1, private equity firms in North America and Europe had secured $212.6 billion in new commitments this year, on pace to eclipse the “already stellar” fundraising year they had in 2016, according to a new report and analysis out Thursday from Seattle-based PitchBook.

“Dry powder levels in North American and European PE funds reached new heights of $738.7 billion as of year-end 2016, exceeding the levels seen at the end of the last fundraising cycle in 2007 and 2008,” writes Dylan Cox, a PitchBook analyst, introducing the report. “Since year-end 2016, interest in the private markets has only intensified. PE and VC firms continue to enjoy immense success on the fundraising trail, adding to their already hefty stores of available capital. Neither asset class shows any signs of slowing down, which could drive valuations higher, leaving dealmakers in a precarious position.”

Private equity funds are closing faster, raising all the money they set out to, decreasing in number, and increasing in size. For example, Apollo Investment Fund IX closed earlier this year with $24.7 billion, the largest PE fund to date.

Explaining the fundraising boom, PitchBook cites private equity’s superior performance relative to public markets and hedge funds, low yields on credit, and ample payouts to limited partners who have chosen to reinvest.

PitchBook expects M&A prices to rise with nearly three-quarters of a trillion dollars burning a hole in private equity investors’ pockets.

“Barring a severe economic downturn, these sums will support future deal flow, putting further upward pressure on pricing for buyout targets,” analysts write in the report. “Since more of this capital continues to be amassed in larger funds, which necessitate larger minimum equity deployments, we expect the average size of PE deals to continue growing.”

Venture capital firms, meanwhile, are likely in the midst of their fourth consecutive year of raising more than $40 billion to invest in startups and growing companies. They had collected $27.5 billion across 165 funds through July, a pace that suggests the potential to surpass 2016’s $51.1 billion in VC fundraising, and signals a decline in the total number of VC funds closed “as LPs continue to consolidate commitments across fewer managers,” PitchBook finds.

(At the same time, limited partners are placing more bets on first-time fundraisers, which have already amassed more capital thus far in 2017—$2.6 billion—than they did in the full year in 2012, 2013, and 2014.)

As with PE, VC funds are getting extra large: New Enterprise Associate’s 16th fund, closed in June, came in at a record $3.3 billion. The median size of new VC funds increased from $28 million in 2012 to $84 million through the first half of this year.

Trending on Xconomy