Private equity firms walked into 2020 with a record pile of cash. The firms, including Carlyle Group and Blackstone Group, have collectively close to $1.5 trillion in unspent capital, thanks to increased competition, which might have made it challenging to spend.
According to a financial data company, Preqin, PE firms – which feature venture capital, hoarded $1.45 trillion of cash or “dry powder” to spend by the end of last year. That is more than twice the amount just five years ago.
Last year about $450 billion worth of private equity deals was sealed, and experts believe this could see a historical number of deals closed.
“We’re entering the year with people feeling much better about the economic and geopolitical outlook than was the case a year ago,” Carlyle global head of private equity research, Jason Thomas said.
Bernstein Research’s head of the portfolio strategy team Inigo Fraser-Jenkins said investors had been pushed away from public markets due to low returns, making private equity a formidable alternative.
According to him, the money flowing into private equity is hiking entry prices which could result in lower future returns.
“We think that the returns are going to disappoint. We also do not believe that over the cycle that it can de-correlate from public markets,” Fraser-Jenkins said during an interview with CNBC.
Low global yields have also contributed to swelling investment in the private equity asset class. When the 10-year Treasury yields plunged to below 2% last year, investors went in search of better returns, chief investment officer and founder of Quadratic Capital Nancy Davis said, further adding that private equity is not yet “a golden goose”.
But it is not just private equity that is piling up cash. Renowned investor Warren Buffet – the industry’s vocal critic – is also sitting on about $128 billion at Berkshire Hathaway.
The company has in the recent times passed on several acquisition deals: In November last year, Mr Buffet stepped down from a fierce bidding battle for tech distributing company, Tech Data. He also wouldn’t buy jewelry giant Tiffany, when it was sourcing for an investor last year.
Unlike individual investors such as Buffet, private equity funds have shot clocks. PE investments have a life cycle of up to 10 years before fund managers get all the money out the door. But Bain & Co argue that Preqin’s $1.5 trillion estimate is mostly “fresh” cash that still has sufficient time to be invested before the maturity period.
“We don’t have concerns that it will go unspent. The question is, how will it be put to work? There’s no shortage of dollars to be put to work or industries to spend them on,” Bain & Co senior director Brenda Rainey said.