The Private Equity Cash Question

Posted by: Adrienne Carter on June 02

When will private equity put its money to work?

As BusinessWeek reported last month, private equity is sitting on roughly $1 trillion in cash—capital that could help revive the economy. And a new study shows the industry continues to spend less money than its collecting from investors.

So far this year, private equity funds have raised nearly $46 billion, according to the Alliance of Merger & Acquisitions Advisors an industry trade group. But they’ve only spent $24 billion of that kitty—leaving an excess of almost $22 billion. Add in the overhang from previous years and private equity firms have raised $400 billion more than they’ve spent over the past decade or so.

The overhang raises a question: does private equity ever spend all of its money?

Since 1998, there have only been two years when private equity has spent all of its money—and more. In 2007, private equity firms raised $265 billion from investors but spent nearly $320 billion on deals. Much the same happened in 2003 when private equity collected roughly $44 billion and invested $52 billion.

There are two conclusions that can be drawn from these periods—either private equity is spending its money wisely or stupidly. Consider 2007. That year private equity did some of the biggest deals on records, including the $45 billion transaction for Texas utility TXU and the $7.4 billion deal for carmaker Chrysler. Many of those deals have been disastrous, and private equity returns plummeted in 2009.

It can also be a sign that there are a plethora of good deals to be found as in 2003. Back then, the U.S. was just coming out of a recession and corporate valuations were cheap. In the years that followed private equity returns skyrocketed.

Here’s hoping that private equity starts putting more of its money to work—and that it signals the latter.

Reader Comments

Tyler Newton

June 2, 2009 05:21 PM

Look at the same stats of VC from the mid-1990s to today. It probably gives you a pretty good preview of what's to come for buyout.

Jose G. Gonzalez

June 3, 2009 11:37 PM

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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