How Private Equity Is Spending Its $4.5 Trillion in Cash By Investing.com

Private equity firms have raised a substantial amount of money of $4.5 trillion. According to Morgan Stanley, this includes approximately $800 billion for alternative asset managers within their coverage, which represents approximately 25% of the average assets under management (AUM).

Analysts at the bank said this $4.5 trillion of “dry powder” represents significant purchasing power, equivalent to about $9 trillion.

Despite a period of subdued deal activity, Morgan Stanley said private equity managers are increasingly optimistic and ready to deploy this capital, highlighting four key themes.

1) Expansion into private lendingAnalysts noted that private equity managers are entering the lender-friendly market with attractive risk/return opportunities.

This includes asset-backed financing and various forms of banking partnerships.

“We continue to see opportunities emerging in banks through asset portfolio sales, regulatory capital transactions and forward flow arrangements,” the analysts said in a note.

2) Acting as capital solutions providers: Firms are bringing a range of liquidity solutions to the market, such as LP/GP-led secondaries, continuation vehicles and hybrid capital. High refinancing demand is causing firms to provide structured solutions to bridge the gap until rates come down.

3) Steps in pockets of disruption: Private equity managers are selectively entering areas of dislocation that offer attractive valuations, particularly in the challenging real estate sector. According to Morgan Stanley, near-bottom real estate valuations offer opportunities in themes such as warehouses, student housing, rental housing and logistics.

4) Lean on high-conviction themes for the long term:Finally, managers are increasingly focusing on secular themes with resilient growth opportunities and long-term benefits, such as energy transition, data centers, AI, digital infrastructure and logistics.

Markets are currently undergoing structural changes, such as in Japan, where decades of deflation are behind us and where shareholders are becoming increasingly active.

“This is encouraging companies to re-evaluate their strategic options and portfolio of businesses and could lead to divestments of non-core assets and privatisations of listed companies,” analysts said.

Morgan Stanley said it has a positive outlook for long-term growth in private markets, driven by increasing investor allocations, innovative products and democratization. These factors are expected to support low double-digit growth in the asset class over the next five years.

“In the near term, we see a cyclical recovery in deal activity that will re-accelerate the private markets flywheel and drive a recovery in earnings, coupled with a rebound in transaction and performance fees.” This expected recovery is likely to improve fundraising efforts as better cash flows return to clients.

Analysts see greater opportunities for implementation in the near term, fueled by improved financing conditions, the need to deploy older cash reserves and a growing number of attractive investment opportunities.