US Private Equity Hangover Persists, Cambridge Associates Says

(June 16, 2011) — Research by Cambridge Associates shows that US private equity funds had a combined $376 billion in assets, net of fees, left to invest as of December 31.

US private equity funds raised $915 billion from 2005 to 2010, of which about half had been called as of December 31, 2010, leaving a $376 billion overhang net of fees, according to Cambridge Associates calculations. While overhang is smaller than it was last year, this may well change in 2011, as several mega funds are either fund raising or actively considering it, the report notes.

“The current overhang remains too large to be absorbed by anything but a replay of the easy credit–powered 2005–08 exit environment,” the report concludes, adding that the problem largely remains in funds of more than $1 billion.

Cambridge Associates’ research states: “A little over a year ago, we posited that the capital overhang in the U.S. private equity industry, while significant, was mainly confined to larger funds, and that smaller funds seemed better positioned due to both a less significant overhang and a better transaction pace. This remains broadly true today, although there are some additional wrinkles to the story—e.g., many funds have looming deadlines to get cash invested, some mega funds are coming back to market, the exit environment has recovered (at least for the moment), and the overhang for mega funds has shrunk a bit. Still, we continue to believe smaller funds (broadly speaking, less than $1 billion) are more attractive, in aggregate, than larger funds.”

The report, entitled “Still Nursing The U.S. Private Equity Overhang Hangover,” finds that the reason for the decrease in leftover capital is that funds with more than $5 billion made investments in 2010 yet raised little to no money. Furthermore, the consultant firm noted that a total of 42% of the current overhang is in funds of more than $5 billion in size with an additional 43% in funds ranging from $1 billion to $5 billion.

Looking ahead, Cambridge Associates reveals optimistic news in the private equity space, noting recent improvements in exit markets. Because of the overhang, according to the report, investors who did not make any new private equity commitments in 2008 and 2009 are still gaining exposure to current investment opportunities.