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In the buyout corner of the private equity business, "dry powder" continued to grow in 2009. Industry slang for capital available for investment, this measure points to how much activity private equity funds are capable of completing. From December 2004 through December 2008, according to data from alternative investment research firm Preqin, the amount of funds on the sidelines surged from $178 billion to $501 billion for the buyout sector, nearly tripling. This year, buyout dry powder only increased by $3 billion, to $504.28 billion. While this may feel like little more than a rounding error, it suggests stability in the sector after what has been a trying climate for financial services business of all types.
Buyout funds focused on the U.S. had the most dry powder, with $279.5 billion on the sidelines, with Europe accounting for $163.25 billion. The bulk of the growth, from 2004 through this year, has come from so-called "mega buyout funds," which have seen dry powder levels spike from $45.9 billion to $253 billion. Mega buyout funds focus on capital commitments of greater than $3.5 billion. Large buyout funds, with capital commitments of $1 billion to $3.5 billion, showed a large increase, as well, climbing from $58.9 billion in December 2004 to $133.69 billion at present.
Now that there's plenty of money on the sidelines, the question that remains is how it will be put to work. Several sectors are primed for M&A activity – the insurance sector comes to mind – which is a natural place to find private equity capital being brought to bear. As acquisition opportunities open up for any reason – from turnaround to bolstering competitive positioning – dry powder will begin to turn into action.
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