No shortage of home for dry powder
The Lens was in New York recently and we can report back to you that there seems to be little concern in America about the large amount of dry powder that is stored up in private equity and private credit.
Dry powder is sometimes held up to show we have reached some kind of ‘peak private equity’. But in the US there are still outlets for this capital. For example, investing in small and medium-sized firms.
Many businesses of this size have seen their peers successfully deploy private investment over the past decade and so they are only too keen to invite funding. In fact, one general partner the Lens spoke to said small-to-mid caps were inviting funding earlier than they would have done historically. This is great for investors, but it also calls for greater due diligence.
As for private credit, a specialist lawyer described it as the number-one asset class for investors in the US private markets sector. The reason for this boiled down to the Volcker Rule – part of the post-crisis set of Wall Street reforms known as Dodd-Frank – that indirectly boosted private debt markets by limiting the extent of bank lending to private equity vehicles.
This caused an increase in the number of debt-related funds from private equity firms post-2008 and this trend is something that has been hitting Europe more recently, the lawyer noted. In Europe, the private credit market has come about with the birth of the senior debt market, which has aided growth in non-bank lending.
In any case, even if we were seeing peak private equity, and even if private credit is – as one panellist put it – “overheating”, professional investors can be expected to find new avenues to help those vast stores of capital find a home.
One area, not surprisingly, is technology, which was described as offering sustainable, longer term investments.
Another one is cannabis.
Wealthy individuals and family offices are the first to tune into marijuana and the investment opportunities in, say, medicine it holds. But when can we expect institutions to get their weed exposure? The Lens heard that institutions in the US are waiting for the disparity in laws between federal approval and state approval of cannabis to be equalised first.
One more thing of note in the US private markets industry was that the timeline along which funds plan their capital commitments is expanding. There are more permanent capital funds being discussed where duration of portfolio construction is unlimited, the Lens heard.
“Some of them will invest for 30 years,” a panellist said.