Private equity investment activity in 2011 will be fueled by what I call the Double Overhang. It is the stuff advisors’ dreams are made of, much like a double overhead day is for surfers. The Double Overhang consists of the $485 billion private equity capital overhang and the overhang of 4,000 aging PE-owned investments.
The majority of the current $485 billion of PE dry powder was raised 3+ years ago, which means that, unless it is invested soon, PE firms will lose their ability to call it down as their investment period expires. This overhang has already begun to affect private equity activity; most noticeable was the 3x increase in PE-to-PE deals (secondary transactions) from 2009 to 2010. Also increasing significantly in 2010 were median deal sizes. For example, the median PE buyout hit an all-time high of $129 million.
The fact that roughly 4,000 companies are at the point where PE firms need to exit is going to cause a huge shift in many firms’ focus. Up to this point, most PE firms have concentrated on raising funds and making new investments—just look at the historical mismatch in deal flow and exit activity. Of these 4,000 mature investments, almost half are 5 years or older, representing at least a 4-year backlog if exit activity doesn’t increase from 2010’s total of 480.
The problem for surfers and their double overhead dreams is finding the actual waves. Advisors luckily don’t have that issue, at least not the ones using the PitchBook Private Equity Platform. Every single one of the 4,000 aging portfolio companies is easily findable in the platform, as are the PE firms sitting on a lot of dry powder. Learn more about PitchBook here.