Key takeaways
- Fundraising has consistently outpaced deployment, leaving large cap PE with 3.5 years of buying capacity.
- Large cap fund assets are aging in place while facing a challenging exit environment.
- Middle market PE contrasts with the large cap dilemma and may benefit from more favorable dynamics.
Large cap PE currently finds itself in a dilemma. Dry powder in need of investment has accumulated, and assets aging in place need exit pathways. Since 2012, large cap funds ($1 billion+) have grown fundraising at an annualized rate of 26% while deployments increased by just 19%. This has pushed dry powder of large cap funds up to $774billion, or 80% of total U.S. PE dry powder. Assuming a 50/50 split of debt to equity on new transactions, large caps have roughly $1.5 trillion in buying power—roughly equal to the last 3.5 years of large cap deals combined.
Higher interest rates have kept dry powder sidelined as large cap GPs balance the pressure to deploy against the risk of bidding up deal multiples. To the latter point, this may already be occurring. When comparing deal multiples by purchaser type, we see that sponsors are paying higher EV/EBITDA multiples (13.1x) on average than corporate acquirers (8.4x), a counterintuitive finding given the synergies a strategic acquirer could presumably extract. This spread is up from just 0.6x in 2016.
Meanwhile, exits have slowed, and portfolio companies have swelled in size as many stay private for longer. Size comes with some difficulty, namely, fewer would-be buyers have the financial capacity to make a control acquisition, especially when rates are elevated. A hypothetical $10 billion acquisition would exceed 10% of market capitalization for over 80% of S&P 500 constituents.
The other traditional exit route for large cap PE is a public listing. The only problem—IPOs have been shuttered. Since 2022, just $31 billion of U.S. PE have exited via public listing, compared to $473 billion in the three years prior. As a result, invested capital among the largest PE buyout funds has spiked—despite the paltry pace of new deals being executed. All told, there has been a pronounced decline in the rate of exits from more recent PE vintages.
The large cap dilemma is a concern for investors and rightfully so. Years of healthy fundraising and reliance on leverage for value creation collided with higher rates. It’s resulted in a capital stagnancy that disrupts the optimal PE value realization cycle.
This dynamic contrasts with what we see in middle market PE. Invested capital has kept pace with fundraising, growing at a CAGR of 9% since 2012,while fundraising grew at a CAGR of 10%. Exits from middle market PE have flourished relative to large caps. In the low-rate environment of 2020 and 2021, middle market exits accounted for just 19% and 15%, respectively, of total exit value as large cap exits boomed. In 2022 and 2023, however, middle market PE accounted for 38% and 32%, respectively, of total exit value. This illustrates the radically different exit optionality of large cap PE versus middle market PE, the latter of which benefits from lower interest rate sensitivity and a broader base of prospective buyers.
