• Dry powder

Dry Powder in Australasia

Dry powder is at historically high levels, at USD $11.5bn as at 30 June 2021 however, down from USD $11.8bn at December 2020. Buyout funds contribute the largest amount of dry powder at USD $6.0bn, however, this is the lowest since December 2018. We note dry powder for growth funds increased 25% since December 2020.

Dry powder committed for investment in Australasia

DRY Power

Since the GFC, there has been a trend towards keeping more in cash reserves awaiting deployment. Several factors drove the increase in dry powder in traditional private capital markets – namely the volatility of 2020 saw many firms accumulate dry powder in wait of greater economic certainty. However, positively, PE's stellar performance over the past few years is being reciprocated with backers investing more money than PE has been able to deploy. Additionally, there is increased market confidence in the Australasian PE market which continues to develop, being viewed favourably to other investment classes across global markets.

“Our sense is that both vendors and PE buyers were cautious during the depths of the COVID-19 crisis given the uncertainty from a macroeconomic perspective. Now that economies are opening up and the direction of the economic recovery is much clearer, it is only natural to see a significant rebound in deal activity (with many deals having been delayed 12-24 months).” - Potentia

We expect to see increased activity in capital deployment over the next year, as investment houses look to deploy their dry powder - or risk suppressing growth and limiting the value of investments over time. At the same time, some PE houses are also looking favourably at debt markets, with distressed debt creating opportunities. While there are concerns that un-deployed capital equals a saturated market, Preqin’s global market evaluation of 186 PE managers highlights that while half believed the market was somewhat over valued and could stand some reduction. Overall, 98% did not see valuations as an issue with confidence in PE’s ability to take on more capital and generate excess returns for their Limited Partners (LPs).

In the Australian market, institutional funds have seen an increase in the value of their assets over the year to March quarter 2021 as local and global markets recovered from the COVID-19 induced downturn. With $3.1 trillion now in superannuation assets, super funds are looking to further diversify their assets through greater allocation to the PE asset class. Further, effective 1 July 2021, the increase in the Superannuation Guarantee rate from 9.5% to 10% and increase in the concessional and non-concessional contribution caps is expected to contribute a flow-on effect to the super fund’s ability to further invest in PE, among other alternative asset classes.

“Super funds are moving back towards tipping money into PE opportunities, on the basis that they need to continue to diversify their investments and there is only so much domestic listed equity that can be held. Hostplus are a particularly strong example of being early backers of PE and Venture Capital (VC), investing heavily in funds such as Square Peg and Blackbird Ventures. Although it’s typically the larger, more liquid funds that have the capacity to do so as the smaller funds don’t necessarily have the regular excess cash flows and as such have to more closely monitor their liquidity.

Regarding internal investment management teams, it is true to say that the vast majority of super funds would have their own investment professionals within a Trustee office. However, it is only the very large ones (e.g. Aussie, Aware, Uni, Hesta, Cbus etc) that are going ‘all-in’ with in-house teams that fully internalise the investment function.” - James Dixon

Funds closed

Number of funds closed & total capital raised

Funds closed PE

The number of funds closed over the last three financial years has remained consistent; however, the average size of funds has increased approximately 2.4x during this period, from USD $101m in FY19 to USD $243m in FY21. This highlights the increased attractiveness of the Australasian PE market, and is a trend we expect to continue as the region’s PE market continues to mature and develop.