How Capital Superabundance Could Burn Private Equity Investors
ByThe continued expansion of financial assets looks to be an enduring feature of the investment environment, which private equity (PE) firms will need to reckon with for a long time to come. However, the very forces that rescued the boom-year investments—record low interest rates and plentiful capital—are magnifying two issues that are making it more challenging for general partners (GPs) to profit from investments they make today. First, asset prices are and will remain high as investors of all types wield record amounts of capital and are willing to bid up acquisition multiples to acquire assets. Plentiful low-cost debt merely adds upward pressure on prices and ensures they will stay high.
The second area where capital superabundance pinches is the longer holding periods that will be needed to prepare fully priced assets for exits that can command decent returns. Simple mathematics suggests that holding periods of five years or more look to be the new norm; it takes at least that long to achieve a twofold return on invested capital at IRRs trending toward the mid-teens, which we are currently seeing prospective acquirers use as their underwriting target…
How Capital Superabundance Could Burn Private Equity Investors
