Private equity investors, holding piles of cash returned from their managers, will have to figure out how to invest it all in 2016, in the twilight years of this investment cycle.
“One of the key areas of focus is: Are we getting long in the tooth for this cycle?” said Andrea Kramer, managing director at Hamilton Lane Advisors LLC, an alternative investment consultant and money manager in Bala Cynwyd, Pa.
”It's been an interesting time,” she said. “We've had seven years of zero percent interest rates.”
While hold periods are longer — up to 5.5 years from 2.1 years — higher valuations have led to portfolio company exits, even in older pre-crisis portfolios, she said.
Meanwhile, private equity firms are raising capital faster than they can invest it. Managers are sitting on $1.3 trillion of unspent commitments as of June 30, according to Preqin, a London-based alternative investments research firm.
Dry powder for buyout firms grew 12% so far in 2015 to $275.1 billion, exceeding the previous highs in 2006-"07, noted EY in its mergers and acquisitions outlook. This is not counting co-investment and other so-called “shadow capital,” which adds to managers' cache of unspent commitments.
Peaking valuations pushed up by growing competition for deals, a tightening debt market and rising equity markets are challenging the general partners' ability to close transactions, said Jeff Bunder, New York-based global private equity leader at EY, in a written statement.
Debt for deals and to make additional investments in portfolio companies will be more expensive in 2016, EY's outlook noted.
“Corporate access to the debt markets is still robust, but pricing will increase as spreads widen, leverage levels will be challenged and covenants will start to shift back to the lender,” the EY report noted.
The slow-growing economy is expected to put pressure on the debt side of the private equity business, Ms. Kramer said. “We see more volatility leading to more pressure on exiting (by private equity managers).”
It will also make it more difficult for private equity managers to raise additional dollars to support portfolio companies through leverage, she said.