Benchmark International

According to a recent webinar hosted by accounting firm PWC, the amount of cash presently held by and committed to private equity funds is at an all-time high. Due to hesitancy shown by fund managers in 2023, cash accumulated rapidly, and the limited partners who provided that cash and those commitments, such as insurance companies and pension funds, are pressuring the private equity management companies to invest that cash or release those commitments.

The managers at those funds make no money by releasing commitments. Their interests lie instead in making investments. In their traditional “2 and 20” compensation model, fund managers make a 2% annual fee on all invested capital. They are allowed to keep 20% of the profit (or the profit after a hurdle rate is achieved) on an investment once it is liquidated. In other words, they work on a conveyor belt Secure the commitments (and make no money for doing so), find targets, call the commitment, and invest the money by buying the targets (start the 2% running on that portion of the commitments), grow and improve the target companies that have been acquired (while collecting the 2% annual fee each year), sell the business for a much higher price than the original purchase price (in order to collect 20% of some of that sale price), then start the cycle again.

There is no incentive for any fund manager to break that cycle. An off-ramp, whether that be releasing commitments or returning cash early, is simply not appealing to the decision-maker.

Yet the dam has not yet broken open. The cash and commitments continue to build. You don’t have to look far to see that deal volume in 2024 has not yet returned to peak levels. The pressure on the dam continues to mount.

On that same PWC webinar, the accounting firm mentioned that the value of assets held in private hands—that includes private equity and privately owned companies yet to be touched by PE funds—has doubled since the start of the pandemic to $14 trillion. So when that dam breaks, there will be ample capacity to absorb the outflows, with larger funds buying out smaller funds and smaller funds buying out founders.

What will cause the dam to burst? A combination of these increasing calls for refunds and releases, fund managers voracious need to throw coal into the engine to keep the train moving around the big circular tracks, a reduction in interest rates, an end to inflation, a soft landing, a favorable election outcome, an end to regional wars, the launch of just the right trade war. You are in the wrong place if you want a tea leaf reading. The one thing that is certain is that whatever the cause is, it is going to happen. I don’t know when; you don’t know when.

What we do know is that it usually takes over a year to sell a business for a healthy multiple. When the dam breaks, will the bounty it releases remain on the table for over a year? Again, no one here can predict that future. But do you have to risk that it will? Absolutely not. A solid investment bank or broker will be willing to work with you to get you into the right position for that eventuality so that when it occurs, you can securely ride that first and largest wave right into the optimal exit.

Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com

Europe: Michael Lawrie at +44 (0) 161 359 4400 / Lawrie@BenchmarkIntl.com

Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com 

ABOUT BENCHMARK INTERNATIONAL:

Benchmark International is a global M&A firm that provides business owners with creative, value-maximizing solutions for growing and exiting their businesses. Benchmark International has handled over $11 billion in transaction value across various industries from offices across the world. With decades of M&A experience, Benchmark International’s transaction teams have assisted business owners with achieving their objectives and ensuring the continued growth of their businesses. The firm has also been named the Investment Banking Firm of the Year by The M&A Advisor and the Global M&A Network as well as the #1 Sell-side Exclusive M&A Advisor in the World by Pitchbook’s Global League Tables.

Website: http://www.benchmarkintl.com
Blog: http://blog.benchmarkcorporate.com