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Overhang threatens health of private equity

Firms both big and small built up substantial war chests during the boom times for private equity. Now they must use or lose an overhang estimated to be approaching $600 billion. Louise Bowman reports on the pressure to do deals the industry faces.

THE LACKLUSTRE RETURNS generated by many private equity firms have barely dented the industry’s image as a moneymaking machine. It was this machine that attracted such large amounts of investment during the boom years, investment that in the new post-Lehman reality has turned from a head start into an Achilles heel. The job of a private equity firm is to buy companies, make them better and sell them for more than they paid for them – and this is what their limited partners expect them to do. But thanks to the excesses of the past the industry finds itself with lots of money and not enough to spend it on.

Recent research by Cambridge Associates in the US and Hawkpoint in Europe has attempted to put a number on just how much money is burning a hole in private equity’s pockets. The figures are startling. The Cambridge Associates research, published in February, estimates that just 40% of the $876 billion that the industry raised from 2004 to 2009 had been called by September 2009, leaving a $445 billion overhang.

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