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Beyond the Arches

Beyond the Arches #5: The private market powder keg

May 23rd, 2023 By Emily Norwood

Featured Story

The private market powder keg

There are record levels of dry powder in the private markets. And no, we’re not talking about pollen in the air – spring has sprung with trillions of dollars of undeployed capital floating around, particularly in private equity.

There are a number of reasons why there’s so much dry powder in PE right now, including:

  1. The strong performance of private equity funds. PE funds have outperformed public equity markets in recent years, which has attracted more investors to the asset class.
  2. Rising interest rates. Rate hikes make public equity investments less attractive, as they now offer lower yields. This has led investors to seek out alternative investments like private equity.
  3. Increasing demand from institutional investors. Pension funds, endowments, and other institutional investors are increasingly looking to alternative assets, such as private equity, to diversify their portfolios.
  4. The growing popularity of private equity among high-net-worth individuals. Deep-pocketed investors are increasingly investing in private equity as a way to generate higher returns than they can get from traditional investments like stocks and bonds.

Whether you’ve already invested in PE or intend to invest sometime in the near future, be aware that the situation could play out in a number of ways. Dry powder can lead to increased deal activity, meaning higher valuations for target companies and more competition for deals. On the other hand, PE firms may be more selective about the investments they make. This could lead to fewer investment opportunities for investors. Additionally, the risk of illiquidity is higher in PE  than in other asset classes. A stalled M&A scene might mean existing investors have to wait longer to exit.

Generally speaking, the record amount of dry powder in the PE industry is a positive sign for investors in the long term – but for those just entering the PE space, it’s important to be aware of the unique challenges involved. Here are some ways for new investors to mitigate risk:

  • Do your research. Before investing in any private equity fund, it is important to do your due diligence. This includes understanding the fund’s investment strategy, performance, and fee structure.
  • Invest with reputable firms. Only invest with reputable private equity firms that have a solid track record.
  • Diversify your portfolio. You know that wise old saying about putting all your eggs in one basket. Be sure to reduce your risk profile by investing in a variety of private equity funds.
  • Be patient. Private equity investments are an illiquid, long-term commitment, so be prepared to wait to exit your investments.

Franchise News

Deal Flow

Macro Trends

  • Surging building activity is proving to be a double-edged sword for the U.S. economy. While prolonging market pain by deterring the Fed from pivoting on interest rates, the construction boom has also dropped the unemployment rate to record lows. 
  • Along the same vein, the spring real estate season is off to a quiet start as home sales fell amidst a shortage of new inventory due to rising interest rates. However, prices are plunging in some of the hottest markets in the country to levels not seen in over a decade.
  • The stalemate over the debt ceiling has spooked the public markets in the U.S. and abroad, but hope of a deal before the June 1 deadline is keeping investors cautiously optimistic. 

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