Week in Review: Dry Powder, Entrepreneurs, and Diversity

Today is the celebration of when Columbus sailed the ocean blue. 520 years later, PE shops are desperate to get rid of their dry powder. Or so the news tells us. Apparently, PE firms have 12 months to spend over $200 billion in dry powder or they have to give it back. All the while, LPs want to add to the war chest by investing even more money in private equity. 

With all this money fighting over the same number of deals, some PE groups might be tempted to move toward entrepreneurs and startups – but some believe the two simply don’t mix. Data also came out last week showing that LPs looking for better returns might want to look at diverse and minority-owned PE shops as they’ve been outperforming the industry average mightily.

Check the articles out below:

More Money Than They Know What to Do With: Use it or lose it, indeed. After a few quiet years, PE firms now find themselves with over $200 billion to spend in the next 12 months. If the dry powder is not spent, not only will the money be returned to LPs, the next round of fundraising could be more difficult — it is hard to ask for a larger fund if you couldn’t spend the entirety of your last one. With more capital chasing the same number of deals, will megadeals return? Crazier things have happened.

Investors Find More Money for Private Equity: Despite the existing dry powder, PE shops are still raising money. According to Preqin, GPs raised over $64 billion in Q3 alone. This brings the year-to-date funding to over $200 billion (the same amount of dry powder…).

Minority-Owned Private Equity Firms Beat Buyout Titans in Study: If you want to find a PE shop that offers relatively strong returns, just take a look around the office. As it turns out, firms that are diverse or minority-owned have achieved higher average gains than the rest of the (homogenous) industry. From 1988 to 2011, these diverse shops realized an average net IRR of 15%. The rest of the industry? 3.7%. If you want to learn more, here’s a copy of the full report.

Why Private Equity and Entrepreneurship Don’t Mix: If entrepreneurs have suddenly turned a cold shoulder your way, this article may be to blame. According to Suren Dutia, PE and entrepreneurship are like oil and water — they just don’t mix. The biggest difference? Innovation. While entrepreneurs thrive on innovation, PE firms sacrifice it for “quick profits.” If entrepreneurs want to stay innovative, they should seek capital from VCs, angel investors, or strategic partners. What about crowdfunders?

To wrap it all up, here’s an interesting conversation with Jason Kelly, Bloomberg reporter and author of The New Tycoons.