GLOBAL private equity (PE) firms are sitting on a record US$2.49 trillion in dry powder as at Jul 3, data released by S&P Global Market Intelligence and Preqin on Thursday (Jul 20) indicated.

“Sluggish” dealmaking in 2023 has presented limited opportunities for PE firms to deploy funds into buyouts and other investments, S&P Global said in its report.

In the year to Jul 3, global PE dry powder – which refers to capital from investors that has not yet been deployed – was up 11.1 per cent.

EY global vice-chair for strategy and transactions Andrea Guerzoni attributed the slowdown in dealmaking to the uncertain global economic outlook and rising transaction costs linked to high interest rates.

A greater level of regulatory scrutiny for private equity deals, especially in the US, is also among the obstacles.

“It’s always possible to do the deal, but it’s more complicated; and it’s becoming more complicated,” Guerzoni said.

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There is a buyer-seller “stand-off” in PE, as sellers “hold out for higher boom-time prices and buyers seek more realistic prices”, Andrew Thompson, partner and head of PE at KPMG Asia-Pacific, told The Business Times. Deals are likely to take longer.

However, he added: “This is an entirely normal part of the PE life cycle and these conditions often lead to the best investing climate when private market asset prices have adjusted to realistic levels.”

Thompson expects to see a significant increase in deal activity going into 2024 and 2025, as pricing returns to fair value, recession fears fade and interest rates moderate.

Potential opportunity

While the PE deal scene remains muted for now, challenging conditions have created potential opportunities.

The current environment can provide investors with significant opportunities to invest in good companies at a discounted price, said PwC Singapore corporate finance leader Girish Sahajwalla.

“The increase in dry powder is in anticipation of the large market correction that investors are expecting in the short term,” he said.

He added that PE investments remain attractive as business owners, investors and companies that are flush with capital post-pandemic are now ready to deploy them.

A large number of special situations and restructuring funds are entering Asia to capture potential opportunities, Sahajwalla noted.

Mid-market deals have also started to pick up in recent months with the outlook of quantitative tightening and inflation growth looking more stable.

“In addition, with the growth in private capital in Singapore and South-east Asia, there is a greater number of investors looking to invest in the mid-market space which will likely drive the recovery of PE activities for the rest of the year,” he said, observing a pick-up in defensive sectors such as healthcare and consumer staples.

The S&P data showed that the PE investor with the largest war chest was KKR, with US$41.8 billion in PE dry powder as at Jul 3. The global investment company made 51 investments in the past 12 months.

This was followed closely by alternative investment management company Blackstone, which has US$40.3 billion in dry powder and made 23 investments in the last 12 months.

S&P Global Market Intelligence noted that the top 25 PE firms hold 19.5 per cent of the total mid-year dry powder, with 19 of them headquartered in the US.