Private Equity Overhang

By Generational Equity


Several times during the past few months we have seen estimates regarding the size of the private equity overhang. This refers to the amount of capital committed by investors to equity firms for investing purposes. When private equity funds are created, most have limited lifetimes. That means that fund managers typically have 5-7 years to invest the private equity overhang, or they have to send the capital back to their investors. Since they really don’t like doing this, the size and the vintage age of the private equity overhang really does matter.

Recently Pitchbook, a leading research company that tracks equity and venture capital fund activity, updated their estimate of the private equity overhang. As you can see from the following chart, although the amount of committed capital has declined slightly, it is still a huge number.

As of the end of 2012 the private equity overhang stood at nearly $350 billion. This is a substantial amount of money that needs to be invested. This is how Pitchbook describes the situation:

“One of the most important aspects of the capital overhang is the large portion of dry powder that is currently held in 2007 and 2008 vintage funds. There is still more than $100 billion left in these vintages, which is more than the 2009 and 2010 vintages. As PE firms typically have a five-year mandate to invest a fund, the dry powder in these vehicles should evaporate in the next couple of years.”

Since equity firms really don’t make any money if they let funds “evaporate,” most analysts point out that the $100 billion in the funds that will be expiring soon will drive equity firms to be even more aggressive in finding great companies in which to invest.

The Hurdle Private Equity Firms Face

But there is a challenge in this: Equity firms tell us the toughest issue they face is simply finding enough good candidates to look at. They are hungry for deals, but they just don’t see enough.

Keep in mind that equity firms specializing in middle-market companies typically make 3-5 acquisitions a year. But to close that many deals, they tell us that they look at hundreds of opportunities – in some cases, several thousands.

The best way for an entrepreneur to rise above the fray and get noticed by an equity firm is to have professional representation. PE fund managers that we approach know that the deals we bring them are “buyer ready.”

To private equity fund managers, “buyer ready” means that the business owners are committed to the selling process (hence our upfront fee); they have gone through our evaluation process and have a realistic value expectation; and they are prepared to meet with and discuss their business with seasoned buyers.

Folks who go at this alone are lacking these characteristics, which is why equity funds have to look at so many companies to really find the ones that are ready for buyer scrutiny.

If you are considering the sale of your company or if you are thinking of bringing investors in to help it grow in the next 2-3 years, you need to talk to Generational Equity. We are the leading middle-market M&A advisory firm in North America based on Thomson rankings. We specialize in the lower middle-market and would enjoy meeting you to further explain your options.


No matter what you do, if you own a privately held company, don’t let the billions of dollars in private equity overhang pass you by. There is simply too much capital and not enough good candidates in the market today. What a prime time to be a seller!

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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