Alternative investment dry powder at the end of 2016 was $1.5 trillion, up from $1.4 trillion a year earlier, but the actual amount of dry powder could be 15% to 20% higher due to so-called shadow capital in the form of co-investments and co-sponsorships by limited partners, according to consulting firm Bain & Co.’s 2017 global private equity report.
Precise totals of shadow capital do not exist, the report acknowledges, but Bain estimates that the largest form of shadow capital — co-investments — amounts to 10% to 12% of traditional fundraising and that combined shadow capital in all its forms — including separate accounts and solo direct investments — could be as much as 15% to 20%.
“What’s clear is that shadow capital is large, growing and here to stay,” the report stated.
“Capital superabundance” is pushing asset valuations higher, the report said. The result is that private equity funds are finding it tougher to find deals at prices that would generate satisfactory returns, the report noted.
The aggregate value of buyout-backed exits globally in 2016 dropped 23% to $328 billion in disclosed value and 19% by number of deals to 984 transactions in count from 2015. However, fewer of the deals in 2016 were from investments made before the global financial crisis. Most of the pre-financial crisis private equity transactions have been sold, with less than 10% of capital invested before the 2008 financial crisis remaining in portfolio companies still held by private equity vehicles, Bain’s report noted. At the same time, median holding periods for private equity-backed companies remained at five years in 2016, unchanged from 2015 but a bit less than the median six-year holding period in 2014.