Private capital dry powder reaches all-time high of $3.7 tn, but pessimism still lingers

Private capital dry powder continued its decade long growth streak and rose to a new record of $3.7 trillion in 2022 even as deal activity across the spectrum remains lackluster and pessimistic, revealed a new report by Bain & Company.

Buyout dry power finished 2022 at $1.1 trillion while growth fund dry powder was just under $350 billion.

“While the long-term outlook for fund-raising remains exceedingly bullish, the environment for attracting new capital in 2023 will be considerably less so. For a variety of reasons, Limited Partners (LPs) are tapped out, and the cash squeeze they are facing will make it difficult to ramp up commitments in the coming months,” said the report titled ‘Global Private Equity Report 2023’.

Overall deal value of growth and late-stage venture funding dropped 28 per cent to a rounded $644 billion in 2022. Rising interest rates and investor recalibration are reducing the value of future earnings and eroding valuations. General Partner (GP) conservatism has also led to more resilient balance sheets but called into question future growth prospects, resulting in fewer companies taking on new funding at attractive multiples. Lower valuations have put growth and venture funds in a holding pattern, with deal activity unlikely to recover until valuations return to previous levels or assets generate higher earnings at lower multiples, the report said.

LPs are under pressure due to various factors, including the surge of capital in private equity in recent years. This flood of capital has been increasing at an accelerating pace, with buyout funds now returning to market every three years instead of five, and asking for 50 per cent more money than their previous funds. This trend has resulted in a 35 per cent drop in the average time between successive funds over the last decade.

“But as exits—and the outlook for exits—slowed sharply in 2022, GPs had to pare back distributions. LPs were already stretched, and the slowdown in distributed to paid-in capital (DPI) created new liquidity issues. That precluded making further commitments until cash flows improved,” it said.

The report said, based on the previous economic downturn, that it is probable that LPs will witness buyout funds retaining several companies for an additional year or two.

“Raising new capital will be particularly hard for midsize generalist funds as LPs continue to favor specialists and large funds with top-tier performance. The same could be said for GPs challenged to generate distributions because their exit volume is dependent on the (now-moribund) market for initial public offerings,” the report said.

As a result, GPs are developing new fund structures across asset classes to attract LPs with specific allocation requirements. While buyout remains the largest asset class, others are growing at double-digit rates. GPs are also diversifying their sources of growth by creating products for untapped pools of capital such as sovereign wealth funds and wealthy individual investors.

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