BOSTON, MA (May 22, 2014) – The current capital overhang confronting the global private investment industry is 23% higher than historical call patterns predicted, according to new research from Cambridge Associates, the global institutional investment firm.
Global capital overhang is the amount of money raised by private capital and real assets funds that remains uncalled—too much overhang could amplify competition between funds, raise transaction values and ultimately challenge returns. Between 2008 and 2013, private capital and real assets funds raised $1.9 trillion, of which about 45% had been called as of December 31, 2013, leaving a global overhang of $909 billion—$168 billion more than the predicted amount of $741 billion (based on historical call patterns calculated from over 3,400 funds spanning vintage years 1990 through 2013).
Certain investment strategies contribute overwhelmingly to the buildup, with U.S. Private Equity, European Private Equity and Global Real Estate together accounting for $655 billion, or 72% of total overhang.
“As the global capital market continues to recover from the financial crisis, annual commitments are rising—supported by yet another record breaking year in U.S. Private Equity of $135 billion distributions to LPs in 2013—but they are still nowhere near the exuberance of the last top. In short, the peak overhang from six years ago is steadily dropping as investment periods for those vintage years reach their expiration date, but this is happening at a slower than historical rate,” said Andrea Auerbach, Managing Director and Global Head of Private Investment Research at Cambridge and co-author of The Global Overhang (According to Goldilocks): Too Much, Too Little, or Just Right?
The overhang number is the aggregation of multiple underlying overhangs; simply splitting the $909 billion into two categories—private capital and real assets—results in global overhangs of $722 billion and $187 billion, respectively. Further localized overhang amounts are more relevant as not all the capital can or will pursue the same transactions.
Some of the report’s main findings include:
- Newer vintage funds still far below pre-2009 peak. Even the largest overhang contributors to global private investment—U.S. Private Equity, Global Real Estate, and European Private Equity—are at a fraction of their former heights (27% below their 2009 peak). This is driven in part by the still recovering fundraising environment in the U.S., where the last five years of private equity commitments still only represent 75% of the total capital raised in 2006, 2007, and 2008.
- Funds of different sizes will likely compete for similar investment opportunities. Although funds of more than $5 billion dollars only account for $240 billion—26%—of the global capital overhang, most of the funds in this category are global in their scope and pursue investments in similar regions, like North America, Western Europe and Asian markets, likely resulting in most of that $240 billion looking at the same set of investment opportunities. The same is true for middle-sized funds between $1 billion and $5 billion.
- Swelling fund sizes can dramatically affect overhang. Commitments to the asset class have been rising for the last three years. Should global capital markets re-enter a phase of exuberant fundraising akin to the pre-2009 peak, larger fund categories will be particularly impacted. A sudden surge in fundraising could dramatically change the overhang in the larger categories practically overnight.
- Beware the “shadow” overhang. Cambridge Associates defines “shadow” overhang as intent to invest in private equity outside of a traditional fund structure, which would encompass institutions participating in co-invest opportunities or pursuing direct investments via their own teams or via independent sponsors. The shadow overhang could easily match the official overhang estimate due to the sizable institutions that state this intent to invest.
“Current market conditions are frothy, with record breaking distributions to LPs underpinning rising commitments, cresting acquisition multiples, easily available credit, and robust capital markets,” added Auerbach. “The global overhang is below its peak but could easily surge again.”
To arrange a discussion with Andrea Auerbach of Cambridge Associates, please contact Frank Lentini at Sommerfield Communications at 212-255-8386 or email@example.com.
About Cambridge Associates
Founded in 1973, Cambridge Associates is a provider of investment services to institutional investors and private clients worldwide. Today the firm serves more than 950 global investors and delivers a range of services, including investment advisory, discretionary portfolio management, research and tools (Research Navigatorsm and Benchmark Calculator), and performance monitoring, across asset classes. Cambridge Associates has more than 1,100 employees based in eight global offices in Arlington, VA; Boston; Dallas; Menlo Park, CA; London; Singapore; Sydney; and Beijing. Cambridge Associates consists of five global affiliates that are all under common ownership and control. For more information about Cambridge Associates, please visit www.cambridgeassociates.com.