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EquityFC Blog
Piles of cash seek finance brains | 14 July 2010
Every finance director knows the value of cash. But there something odd going on the business world right now. There's lots of it about - and no-one knows what to do with it. So what does that mean for PE-backed finance executives?
My data is largely from the US. OK, most of you are looking at UK opportunities - but I think the lessons still hold. For example, this chart shows the amount of liquid assets held by US corporates (and I know from anecdotal evidence that the picture is similar over here):
That's a lot of cash without a home. The picture gets worse: private equity funds around the world have been wrestling with "overhang" (funds committed by investors or "LPs", limited partners) for some time. The best recent estimate of PE's undeployed cash? Check out this PwC article on the subject. It says: "The current private equity overhang at nearly $850 billion (three and a half times the overhang in 2000) represents 54% of all capital commitments made between 2004 and 2009. Over 85% of the $850 billion is in funds larger than $1 billion, including 48% in funds larger than $5 billion, according to Cambridge Associates."
Result? LPs are reluctant to commit new cash, and while the big LBO players aren't that fussed - that unspent pile of cash is the bigger concern - the mid-market and VC end of the scene is taking a hit. Witness the recent drop in US VC fund allocations.
So what does this all mean for you? First, brush up your capital allocation skills. Investors (and corporates - although the fact you're here suggests you'd rather not work for a plc!) need to deploy money. But they're petrified that they won't make a return on it. That's a pretty damning indictment of the economy when interest rates are so low. And I think it means there aren't enough creative finance execs with good communication skills out there, standing up the business case for investments. Great entrepreneurs and marketing people are one thing; but without a proper investment appraisal, properly communicated, that cash is going to remain dormant.
Second, pick your markets. PE firms - particular in the mid-market and at the VC level, but across the board now that financial engineering is a dead duck - need growth right now to turn a penny. And with the economy flirting with a double dip, that means plumping for companies that have a compelling case whatever the climate. In short, some sectors are more resilient than others. Choose wisely.
(By the way, here's a link to a rather goo, rather long article on PE at the moment - worth a read if you have a few minutes spare.)