By David G. Barry
The amount of dry powder that the buyout industry has at its disposal fell in 2021 for the first time since 2012.
That trend, however, is not looking like it will continue. According to industry tracker Preqin, the buyout industry as of June 1 had $873 billion of dry powder – capital that has been committed by investors but not yet allocated to deals. That’s up from $870 billion that the industry had at the end of 2021. Overall, Preqin estimates that the investment industry – excluding venture capital – has $1.86 trillion – up 3% from the $1.81 trillion it had in December 2021. The buyout industry in 2021 saw its first decline in dry powder since 2012 as it fell $39 billion from its all-time high in 2020 of $909 billion.
Kebelyn Lee, assistant vice president research insights for Preqin, said the drop in dry powder in 2021 was the result of “stronger growth” in buyout deal activities compared with buyout fund-raising growth. In fact, during the year, the value of deals done by buyout firms was a record $850.6 billion. In contrast, buyout firms raised $364.1 billion – an increase over the $307 billion done in 2020 but down from the $403 billon raised in 2019.
However, Lee said that while fundraising in the first part of 2022 has slowed, deal activity has as well. That, in turn, sets the stage for an increase in dry powder for at least the first half of the year and possibly the end of 2022, he said.
Through the end of May, Preqin said that firms have raised $92.1 billion. The firm is projecting for the first half of 2022, the industry will raise $110.5 billion and that for the year, the total will be $221 billion – which would be the lowest fundraising year since 2015. On the deal side, Preqin said that the value of deals done as of June 1 was $303.6 billion. It is projecting that the value of deals done for the first half will be $364.3 billion and the year will be $728.6 billion – which would be down from 2021 but would still be the second-largest total.
The amount of dry powder that the industry has is noteworthy for several reasons.
First, it shows that the industry is well funded and could survive for some time if fundraising were to become increasingly difficult. But it also should be noted, limited partners have entrusted PE firms with capital to invest – not so it can be kept on the sidelines. This, in turn, means that firms with large amounts of dry powder are under pressure to deploy it.
The amount of dry powder also sends a signal to institutional investors that they need to proceed cautiously with new fund investments. They have, after all, needed to come up with the capital to fulfill past fund commitments.
Pitchbook, another industry tracker, estimated that the largest 25 firms hold 25% of uninvested capital and that half of the capital was raised in 2019 or later. Blackstone, for instance, said it had $139 billion at the end of the first quarter – $67.2 billion of which was in private equity. KKR, meanwhile, said it had $115 billion of dry powder in the first quarter, up 66% from the $69 billion it had a year prior. Apollo said it had $48 billion of dry powder -- $17 billion of which was in its private equity portfolio.
KKR Co-CEO Scott Nuttall does not see the amount of dry powder in the marketplace as a negative. Speaking at the Alliance Bernstein 38th Annual Strategic Decisions Conference 2022, Nuttall was quoted as saying the purchasing power of dry powder “has gone down, because leverage has gone down over the last 30 years.” He said that private equity today can buy a “diminishing number” of S&P companies and at the same time Europe and Asia have become big alternative markets. As a result, he said that “as a percentage of the overall opportunity, alternative asset management is not that big. So, yes there’s a good amount of dry powder, relative to what we used to have, but relative to the opportunity set, we are still short capital and long opportunity.”