Much has been said about PE dry powder levels, which continue to peak year after year. As of the end of last June, there was more than $848 billion in unspent buyout/growth capital across North America and Europe, per our 2017 Annual PE & VC Fundraising Report. That’s still a 22% increase over year-end 2016 numbers—a noteworthy surge in the span of six months—and it's a concern for many. How are investors supposed to deploy so much capital in a competitive, frothy market? Quality targets are hard to come by, and the ones that do come to market cause a ruckus, like a good "Shark Tank" episode.
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 theaverage 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.