The private equity overhang – the amount of capital raised by private equity funds that remains uncalled and available for investment – is down a substantial amount from its peak, according to research by Cambridge Associates, the investment adviser to institutional investors.
The overhang declined from a peak of $445 billion at the end of 2009 to approximately $325 billion by the end of 2012, according to Cambridge Associates.
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"A combination of factors, including time and current market dynamics, have whittled away at the sizable overhang in place several years ago to a more manageable amount today. However, the active fundraising environment could cause the overhang to crest again, particularly for larger funds," said Andrea Auerbach, managing director and head of private equity research at Cambridge Associates.
By fund size categories, as of year-end 2012, the overhang for funds over $5 billion stood at $133 billion, funds between $1 billion and $5 billion had a $122 billion overhang, and funds of less than $1 billion faced a $70 billion overhang.
There is also the issue of a "shadow" overhang – additional capital that large institutional investors, including sovereign wealth funds, have allocated to co-invest alongside sponsors or invest directly into private equity. This shadow overhang contributes to market dynamics by increasing the total amount of capital available for investment.
Auerbach pointed out that the funds raised during buyout bubble era currently comprise a little over one-third of the current overhang and these vintage years continue to approach "the end of the conveyor belt" in terms of expiring investment periods.
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By GlobalDataRecent fundraising activity has yet to match the levels experienced in that era. "The overhang is one of many private equity market elements investors should consider when evaluating investment opportunities in this asset class," says Auerbach.
