Does dry powder reflect too much competition and too few targets? Yes, in part, but competition and deal flow will always have an impact. We wanted to see if fundraising levels are outpacing deal activity at a rate that justifies industry concern. To measure that pace, we used a trailing three-year average of total fund contributions as a proxy for investment activity. What we found suggests that capital deployment has accelerated almost in tandem with increasing dry powder levels.
Through mid-2017, North American and European PE had about 4.2 years of dry powder on hand. Even bringing early 2017 fundraising into the picture, that isn’t a huge increase over recent years. Investors had nearly 3.9 years’ worth in 2016, and as far back as 2012 the average was just under 3.7 years. Compare that to pre-crisis levels, which peaked at nearly six years’ worth of dry powder in 2006. PEGs would have boasted about that figure at the time, but it’s alarmingly high in hindsight. We should keep today’s slower pace in mind before we get too concerned this time around.
This column originally appeared in The Lead Left.
Read more about PE dry powder in our 2017 Annual PE & VC Fundraising Report.