Private equity dry powder accumulated at an accelerated pace in the first half of 2024 even as an improving M&A environment opened more opportunities to deploy that capital into buyouts and other deals.

Global private equity and venture capital funds held a record $2.62 trillion of total uncommitted capital as of July 10, according to S&P Global Market Intelligence and Preqin data. Funds added $49.44 billion to their collective cash reserves in the six months since December 2023, more than 1.7 times the $27.97 billion in dry powder they added during the previous 12-month period.

Chances for private equity to chip away at the mountain of dry powder are improving, said Glenn Mincey, head of private equity for KPMG. Private equity-backed deal activity, running slower since inflation and interest rates spiked in 2022, ticked up in the first half of the year, raising hopes for continued improvement in the second half, Mimcey said.

"When that deal market comes back, it will come back much more quickly and more robust than anticipated," Mincey predicted.

Concentration

The 25 private equity and venture capital firms with the largest stores of dry powder collectively reported $556.19 billion of uncommitted capital, or more than 21% of all private equity dry powder globally, according to Market Intelligence data. Topping the list as of July 1 was US-listed alternative asset manager KKR & Co. Inc., with $43.86 billion available for private equity investments.

The concentration of so much global dry powder with a relative handful of firms reflects the uneven playing field for private equity fundraising, Mincey said.

Private equity fundraising plunged to a six-year low in 2023. A tough dealmaking environment is partly to blame, limiting entries into new private equity deals and also exits from current portfolio company investments.

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Fewer exits meant less profit returned to investors, who reinvested their limited cash on hand into long-standing partnerships and risked less on up-and-coming fund managers.

"Some of the mega-funds that have a very proven track record over the years, they had very little difficulty in fundraising, and you kept seeing the size of their funds would increase, whereas [funds in] the tiers down were having difficulty fundraising," Mincey said.

Deployment outlook

Data suggests that private equity deal activity is emerging from two years in the doldrums, improving the odds that dry powder will be deployed into deals. The $189.05 billion in announced deal value between Jan. 1 and May 31 represented a 9% improvement over the same five-month period in 2023.

But the industry has not completely overcome the obstacles that arose in 2022, when spiking inflation prompted central banks across the globe to hike interest rates. George Casey, Linklaters' global chairman of corporate practice, said buyers and sellers are still having trouble seeing eye to eye on valuations.

"There are still some lingering concerns about the economy, about inflation, about the fact that interest rates are not being cut as quickly as people were expecting early in the year. And with interest rates higher, it's more difficult for market participants, particularly on the PE side, to finance their deals," Casey said.

Secondary sales are a potential source of deal flow for private equity firms, which are facing increasing pressure to monetize aging investments. Bain & Co. earlier this year estimated half of the roughly 28,000 portfolio companies held by global buyout funds had been held four years or longer, meaning they are fast approaching the end of a typical investment period.

"We will see more assets coming on to the market from those PE firms," Casey said.