The Private-Equity Stash

How can you tell if your company is a private-equity target? With the record volume and total value of deals announced by private-equity firms so far this year, and the diversity of transaction types and sizes, your board may have to come to terms with this distinct  possibility.

One way to gauge the odds of being acquired by private equity is to consider the enormous amounts of capital private-equity firms have raised over the first half of this year versus the cumulative amount of announced deals. Based on the remaining uncommitted cash, it strongly suggests that, barring a change in the economy, deal-making will continue at a rapid pace over the next six months to a year.

“The fund-raising machine is running full steam ahead, so there is no reason to think that the deal-making machine will slow down any time soon,” says Bob Keiser, vice president of proprietary research at Thomson Financial.

Making an educated guess at just how much dry powder—or overhang as it is sometimes called—private equity firms have stashed in their coffers is not easy. Earlier this year, a source at the Blackstone Group estimated that the funds available to be invested by global buyout firms were in the range of $400 billion, according to an article in Fortune magazine. Private Equity Intelligence, a London-based research firm, says the amount is roughly $300 billion to $350 billion for global buyout firms. These figures may underestimate the true number: Another private-equity expert, who wishes to remain anonymous, says that the figure, which is calculated by subtracting announced fundings from what has been raised, is closer to $700 billion, including all types of private equity. The exact number can be hard to pin down because private-equity firms are unregulated and under no obligation to report their figures. “What’s been raised and what has been committed are fairly soft numbers,” says Greg Peterson, a partner in the Transactions Services group of PricewaterhouseCoopers. Buyout firms don’t always announce follow-on investments, or they are coy about exactly how much they have raised, he says.

There are no doubts, however, about the fact that records are being set in private-equity fund-raising. According to Private Equity Intelligence, private-equity firms raised $260 billion in new investment funds worldwide during the first half of 2007. Of that, 67 leveraged buyout funds raised more than $116 billion. Thomson estimates fundraising by buyout firms during 2006 to be a record $188 billion. Many firms ultimately took in more than they initially set out to raise. Goldman Sachs, for example, closed a $20 billion fund in April that was originally planned for $10 billion. Blackstone also amassed a $20 billion fund, well over its initial target. “They are raising more money, deploying it quicker, and then going back for more,” says Peterson. “They are also exiting their investments quicker and with positive returns.”

Of course, the amount of capital that private-equity firms raise is just a fraction of their buying capacity due to leverage. Josh Lerner, a professor at Harvard University, says that deals being done today typically use about 70 percent debt. Using that multiplier and the conservative $400 billion figure from Blackstone, the collective buying power of private-equity firms could be as high as $1.3 trillion dollars.  “It’s hard to net out dollar for dollar and figure out the cash on hand,” says Lerner. “But no doubt it is at an all-time high.” Whether or not they will find ways to employ it all—or if the bond market will hold up long enough for them to use it—is quite another story.