Private equity's next thing to worry about
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Illustration: Aïda Amer/Axios
Limited partner fears about private equity distributions being delayed into 2026 are becoming realized, and now a new worry has emerged.
- What if lots of deals get done later this year, but for the wrong reasons?
Private equity and venture capital funds are sitting on around $1.7 trillion of dry powder, the term for capital that's been committed but not yet invested, per data from Cambridge Associates and PitchBook.
- This includes nearly $140 billion raised in 2019 or 2020, which is of particular note because funds typically have just five years to build their portfolios. And another $200 million from 2021, some of which also could hit the end of its investment period this calendar year.
One option for GPs sitting on lots of dry powder would be to cut fund sizes by letting LPs out of a portion of their commitments. But GPs promised the kids a trip to Europe and themselves a new Porsche, and they're nothing if not men and women of their word. So fund size cuts aren't happening.
- Another solution would be to ask for investment period extensions, which can work out for both sides — depending on how the fees get structured. And that is something that's happening, at least anecdotally, according to Cambridge Associates private investments head Andrea Auerbach.
Then there's Door No. 3, which is that GPs will start putting the money to work for the sake of putting money to work.
- To be clear, this is an LP fear that hasn't yet been realized. Capital calls still remain pretty light, which isn't too surprising given the recent market turmoil.
- But it's also a scenario that I've heard from numerous sources this week.
But wait, says rhetorical reader, why would GPs make bad deals? Won't that hurt their carry?
- First, GPs wouldn't intentionally make bad deals. They'd just be more liberal with what makes a good deal.
- As for the carry, that is indeed a risk. But the more present danger is to lose the flow of management fees, and you can't begin investing a new fund while the prior one remains active.
The bottom line: There's still the chance that "Liberation Day" becomes a historical footnote, paving a path for the quality dealmaking boom so many had expected. There's also a chance that LPs will be asked to write checks stained with their tears.
