By Charlie Conchie
The amount of cash being sat on by private market investors has tumbled this year as central bankers roll out more aggressive rate hikes globally and choke off a stream of cheap cash.
‘Dry powder’ stored up by private market investors globally reached a peak of $3.69tn last year but has slumped 13 per cent this year to $3.2tn at the close of the second quarter, according to data from investment analysis firm Pitchbook.
The fall in stored-up cash comes as a sharp downturn in public firms’ valuations bleeds into the private markets and funding dries up.
Analysts at Pitchbook said the sharp fall in dry powder has been felt most keenly among private equity firms, while the wider private capital landscape had held up more firmly.
“From 2020’s high of $1.5tn, it dropped 17.5 per cent to $1.2tn at the end of Q2 2022. Of note, a greater proportion of dry powder is sitting in $1bn plus sized funds in recent years, as investors have favoured larger funds from more experienced managers,” said Anikka Villegas, Analyst, Fund Strategies & Sustainable Investing.
“An implication of this is that PE investors will seek large targets to put that money to work.”
Villegas added that an implication of this fall was that they would begin to scour the public markets in search of “attractive candidates for take-privates”, particularly as prices remain subdued by the sustained downturn.
US raids
Analysts have said that depressed valuations in UK markets have made firms vulnerable to takeover swoops from cash-flush US buyers.
“With a weakening pound, and the UK stock market trading at an ever-wider valuation discount to global peers, many UK firms are attracting a high level of investment interest, especially from private equity firms, who are looking to put their significant dry powder to work,” said Merlin Piscetelli, EMEA lead at investment data firm Data Site.
“This substantial volume of unspent capital among both private equity buyers and lenders is also fuelling increased leveraged buyouts of midsize companies. And with the UK’s relatively flexible takeover rules, British companies can be attractive targets, especially for companies from the US.”
A Datasite survey of 500 global dealmakers, 100 of which were from the UK, shows that 61 per cent of UK M&A professionals expect to do the most cross-border deals with the US in the next 12 months.
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