NEW YORK (Reuters Breakingviews) - Private equity's cup runneth over. Apollo Global Management just accumulated the largest single pool of capital earmarked for buyouts, at $23.5 billion. The haul adds to a growing stockpile of dry powder that could make outsized returns harder to come by. With yields so low across most markets, however, it should be easier to make fund investors happy.
Cash is being raised at a rate not seen since 2008. London-based CVC Capital hauled in more than $18 billion for Europe's largest buyout vehicle earlier this year, Silver Lake pulled together $15 billion for tech deals and KKR set a record in Asia with a $9.3 billion fund while also putting the finishing touches on a $13.9 billion U.S. fund.
With so much money sloshing around, it’s getting harder to imagine how it all will be invested profitably. Research outfit Preqin estimates there’s some $920 billion available in private equity. With leverage, that’s more than $3 trillion to deploy. Apollo itself still has nearly 30 percent of the $18.4 billion fund it raised four years ago to invest, executives said in an analysts’ earnings call in late April.
The deluge will inevitably weigh on returns. Apollo’s 2013 fund, which has acquired home security operator ADT and cloud-computing company Rackspace, has generated a net internal rate of return of 16 percent as of March 31. There’s still plenty of time, but that’s less than the 26 percent rate of its 2008 mega-fund and far below the 44 percent IRR generated on a $3.7 billion buyout fund of 2001.
Apollo co-founder Leon Black is like the proverbial hiker who encounters a bear in the woods. He only needs to outrun his peers, not the bear. Slow economic growth, historically low interest rates and massive bond buying by central banks have depressed returns across all asset classes. Hedge funds, one of the closest comparisons, have generated annual gains of just 4.9 percent over the past five years, according to Hedge Fund Research's Fund Weighted Composite Index.
Even shrunken returns appeal on a relative basis. According to Greenwich Associates, a net 12 percent of big fund managers plan to significantly increase their private-equity allocations over the next three years, more than any other investment except direct real estate. That suggests Black and his fellow buyout barons have considerable room for error built into their mega-funds.
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