Pitchbook has published a report (Q2/2009) which raises the concern of a so-called « capital overhang» in private equity in the US. Unfortunately, it fails to convince just like the previous reports had (Preqin among others).
As usual, the authors of the report have made the title of the news but do not mention that the funds raised in 2007 and 2008 are commitments. This means that actually, limited partners have not paid in the total mentioned. And that’s the worrying part: why would there be an overhang if the general partners did not actually call the capital? They can still downscale their funds later on at no cost for the limited partners (except maybe for solvency and prudential reasons). The reverse is not true: fund raising has costs and implies strong delays.
Additionally, the usual investment period is of 5 years (and usually can be extended by one year). This means that the GPs can wait for a recovery on the credit side to deploy their capital – which is the reason why they did not so far.
So, a rather misleading picture, as we actually need to wait 3 to 5 years to see if there is a real overhang. Given the development of secondary BO, I would not be surprised that GPs find a way to deploy this capital regardless the situation on the stock exchange or on the trade sales side.
One of the worrying points, though, is the lack of secondary VC. Unless the stock exchange or trade sales pick up, the start-up pile up will prevent more capital deployment.
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