Private equity firms have more money than they know what to do with. On Oct. 1, New York Times reporter Andrew Ross Sorkin reported in "DealBook" that private equity firms are sitting on $1 trillion, what is termed "dry powder," and that if they can't find ways to spend it they may have to return the money to their investors.
Such was the case with Centerbridge Partners, a private investment firm with offices in New York and London, which is planning to, or by now has, returned $500 million to investors, as reported by the Financial Times late last month. That article attributed the surplus problem to the Fed's easy money policies.
According to The New York Times, some big firms are addressing the issue by letting their Wall Street connections know they're looking for acquisitions worth $10 billion or more, a term referred to as "elephant hunting." And at least two firms the Times said, "have gone as far as asking investors if they can extend their deadlines for returning the money."
The year didn't start well for private equity.
Bain and Company, a leading adviser to the private equity industry (and unrelated to Bain Capital), in a report at the start of the year described the private equity industry as "awash in commitments" with "nearly $1 trillion of dry powder, anemic exits, and almost $2 trillion worth of assets still on general partners' books, more than 75% of them valued below carry hurdle rates," as noted on its website.
To paraphrase Bain's prediction, as reported by Sorkin, 2012 will see too many firms compete for too few good deals, driving deal quality down; prices will balloon and management fees will drop, all of which will result in making it harder for private equity firms to raise funds in the future.
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