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Quarter-End Insights

Private Equity: Firms Revamp the Traditional PE Playbook

As capital continues to build up from strong fundraising and competition for deals across the spectrum heats up, PE firms are adapting to a more challenging environment.

  • Private equity funds have seen strong inflows in 2018 as institutional investors continue increasing their private equity allocation.
  • Though fundraising and dry powder have proliferated in recent years, private equity deal-makers have accelerated their investment pace to put that capital to work.
  • Private equity firms are utilizing new value creation levers, including add-on acquisitions and longer hold periods, to adapt the traditional LBO model for a climate of higher prices and increasing competition.

Fundraising in 2018, and the years prior, has been strong as large institutions continue to increase their allocation to private markets, especially private equity. Fueled by this strong fundraising, private equity firms deployed more capital from 2015-2017 than any other three-year stretch in history. Even though investment activity has been strong, uncalled capital has continued building up, leading to record dry powder figures. Rather than focusing on the absolute number, we prefer to put it in perspective by normalizing dry powder for current levels of investment activity. Looking at the average amount of capital allocated over the trailing three-year period, we find that private equity firms have 3.9 years of dry powder on hand. In other words, if private equity firms were to cease fundraising immediately, it would take 3.9 years to invest all available capital. While still below the 2006 peak of 4.1 years, this figure has been steadily trending up since the global financial crisis.