Alternative investment managers still building up dry powder

Uncalled investment capital, or dry powder, among alternative investment managers according to Fitch Ratings.

Elevated market multiples and increasing late-cycle behavior, such as loosening deal terms and structures, is driving the trend but diversity of assets under management (AUM), locked-up fee streams, variable costs structures and solid liquidity profiles continue to underpin the Stable Outlooks for large, diversified alternative investment.

The ratings firm reports that among the firms it rates, dry powder increased 18% year-over-year at the end of June 2019 to U$387 billion while global dry powder increased 11.2% to $2.1 trillion year-to-date.

Of this YTD figure, private equity buyout funds accounted for the largest share (35%) and growth funds increasing most rapidly at 23%, driven by investor demand in software and IT.

PE funds also saw returns that outperformed the S&P500 but there is concern that the market is at the peak of the equity market cycle and 48% of investors believe a market correction will occur within 12 months.

Despite a 32% year-over-year decline in buyout deal activity for the first half of 2019, greater amounts of capital to put to work in mega funds have led to larger buyout deals, a trend that is expected to continue, which benefits global investment managers that have the scale to participate.

While deployment activity remains robust for the largest, diversified alternative investment managers rated by Fitch, those firms with more limited AUM diversity may face difficulty raising capital and finding attractive investment opportunities during various market cycles, leading to consolidation, Fitch warns.