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As of late, the M&A industry has been examining the crisis of “dry powder” within private equity groups. “Dry powder” refers to the unused capital resting in the hands of private equity that has yet to be invested. In private equity, capital typically has a limited life span (an average of five years), before it is returned to its investors. The large amount of dry powder currently flooding the market indicates that private equity firms are holding back on their ability to invest.
Private equity firms raised a large amount of capital just before the recession occurred in 2008. Currently, the life span of a majority of the available principal is running out simultaneously. Private equity now sits on a trillion dollar amount of wealth that is due to be returned to the original investors in the near future.
As researchers delve into potential reasons for why such a large sum of money remains stagnant, it has surfaced that private equity groups are holding back on the commencement of M&A deals due to a lack of viable options. While a number of businesses are available for investment, most of the capital remains in the overhang because of the deficit in worthy acquisition opportunities. The market appears to be laden with companies lacking a steady growth margin. Private equity almost always invests in businesses with high growth patterns that demonstrate a potential for a return on investment.
All of this dry powder presents itself as a dilemma. Private equity wants to invest, and possesses plenty of capital to buy up the market, but these firms lack worthwhile opportunities at the moment. If these private equity groups continue to suspend their funds, it could prove to be a disaster for the market. Once the money is returned to the investors, it will be difficult to raise any more capital in order to replenish their supply, and the private equity groups will be left with little, if any, capital to work with in the future.
One manner in which private equity groups have been attempting to remedy this situation is by doing a lot of shopping before time runs out. Many of these transactions are turnover deals; or purchasing a company for the sole purpose of turning it around and selling it to a new buyer. These firms must invest their overhang capital as soon as possible in order to prevent their downfall.
Despite the recent spending, a large sum of money in private equity (over one trillion dollars) still lies unused. This, however, could prove to be a positive for business owners. Private equity firms may not hesitate to pay a premium if they believe that an acquisition would prove to be a positive investment.
Could your business be the next great candidate for a private equity acquisition? Contact George & Company in complete confidence and decide if selling your business is the right decision.