- Capital-raising outraces deployment
- Firms avoiding big take-privates
- Dry powder trend extends to middle market
Collectively, dry powder for Apollo Global Management, Blackstone Group, Carlyle Group, Kohlberg Kravis Roberts & Co and Oaktree Capital Group stood at $221 billion as of June 30. The firms drew in a combined $53 billion in capital in the second quarter. Leaving out Oaktree because it doesn’t provide a capital deployment figure, the firms only put about $13 billion to work over the same time. (See accompanying chart).
The reason for the big war chests? After returning tens of billions of dollars to limited partners over the last two years, many of those investors continue to plow much of that back into funds.
In their quarterly updates to Wall Street, the titans of private equity found themselves in a position of suggesting that the current trend of investing less than they take in will even out over time.
“Let me put it this way, we would never take in more money than we thought we could deploy wisely,” Blackstone COO Tony James said on a conference call.
Blackstone distributed about $60 billion to investors back over the last 12 months,while it raised $31 billion in new capital in the second quarter, including $16.7 billion for its latest flagship fund, Blackstone Capital Partners VII. It expects to hit the hard cap of $17.5 billion for that pool.
“The reason that we have these caps and the reason we turn away these investors is because we don’t want to take on more than we can invest,” James said. “We’re maniacal about protecting the historic returns. The returns that we earn today are just as good or better than we have ever earned, and we will preserve that as our goal.”
About half of Blackstone’s supply of dry powder was raised within the last two years, giving the firm a relatively long runway for deployment across its private equity, real estate, hedge fund, credit and secondary platforms. But with all its billions, Blackstone said it’s avoiding larger take-private deals.
Big shops remain cautions in deal-making
“In private equity, this is not a market to do the big blockbuster public-to-privates,” James said. “Those prices are too high. This is a market where we have to be more creative and do more individualistic things where you can create a lot of value.”
Overall, the big shops remain cautious about deploying capital in the face of high deal prices, elevated leverage levels, recent uncertainties related to Greek debt, volatility in the Chinese stock market, and drops in energy and commodity prices.
“The question on everyone’s mind is probably, ‘Why aren’t you investing more money?’“ Bill Conway, co-CEO of The Carlyle Group, said on July 29. “We believe current conditions will serve as a catalyst for the next round of buying opportunities. And while we cannot predict when or how these opportunities will present themselves, the breadth of our platform and our dry powder positions us to take advantage when the time comes.”
Carlyle’s co-CEO David Rubenstein said the build-up in dry powder hasn’t been a major worry to LPs. Their bigger concern appears to be whether they get the allocations they want in key funds.
“Obviously, they know we can’t put the money to work right away,” Rubenstein said. “But remember, they’re going into funds that have five-year investment periods, so they recognize that it might take time to get the money invested.”
Outside of the mega-funds, middle-market firms also have been amassing dry powder, with LPs keen to put the money into deals.
David Hellier, a board member of the Association for Corporate Growth’s New York branch as well as partner at Bertram Capital, said LPs want to work with firms that can deploy capital quickly.
“They like buyouts because they do see a premium return across the sector, but when they commit, they want the money to go out the door,” Hellier said. “You’ll hear more dialog around velocity. LPs are looking for firms that are able to efficiently get capital deployed.”