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It’s a new year and a new decade, and private equity finds itself in something of a paradox. PE firms have record amounts of unspent cash on hand, and they plan on heading back to the markets to raise still more.

Private markets continue to attract investors looking for the historically higher returns that can be found outside the public markets. The upshot: PE fundraising this year will likely come in fairly steady, near 2019’s record haul.

With all that cash on hand, it’s no surprise there were plenty of massive deals in 2019—including Swedish PE firm EQT Partners’ buyout of the skin-health unit from Nestlé for $10 billion (one of the largest such deals in 2019). And with Blackstone Group’s $3 billion deal (via their newly-minted Blackstone Growth Equity division) to obtain a controlling stake in MagicLabs (the company that owns dating app Bumble), PE firms appear to be finding new areas, like growth equity, to allocate their capital.

The PE mega-funds (those with over $5 billion), like those managed by Blackstone and KKR, are making up the largest proportion of capital raised, at levels not seen since 2007 just before the housing crisis hit, according to PitchBook.

Although returns in PE are tapering off slightly en masse, investors show no signs of being scared off. In fact, from a “net net” basis, the best returns are still coming from private markets, says Jill Shaw, the managing director at global investment firm Cambridge Associates. That’s “even if the absolute return expectations are coming down.”

One thing that’s lifting the market is the supply-side dynamics. PE deal prices continue to rise and the market for fundraising remains solid.

In 2020, fundraising likely won’t hit last year’s record (see chart), but analysts are still projecting PE fundraising will surpass a robust $200 billion this year, according to PitchBook—a solid amount that’s just slightly off the previous record hit in 2017 (with $241 billion raised).

“For the market, [2020 is a] continuation of the same trends from 2019, which is increased money flowing into the market and steady increases in prices being paid for businesses,” says Ian Loring, the managing director at Bain Capital Private Equity.

“Dry powder”

Right now, private equity is sitting on a massive nest egg.

According to recent data from Preqin, the private equity industry (which includes venture capital) has a record $1.5 trillion cash pile of so-called “dry powder,” or undeployed capital, going into 2020.

While plenty of high-growth startups have looked to the venture capital markets for fast (and big) funding, many companies are leveraging private equity capital to help them undergo transformational periods (such as expanding geographically or to drive M&A) in their businesses and “help accelerate that change,” Bain’s Loring says, utilizing, in the process, some PE firms’ operational capabilities.

Still, the concern remains that the PE market is one of too much capital chasing too few deals. And that’s driving up deal multiples—potentially bad news for firms who may be buying too high and limiting returns. According to PitchBook data, median PE deal value ticked above the $250 million mark for the first time in 2019. Loring notes that high prices in PE are “something that we all need to be incredibly mindful of. Buying things at the peak cycle … is a precarious proposition.”

Yet some firms don’t necessarily see the extra powder as a bad thing. In fact, Erik Hirsch, vice chairman and head of strategic initiatives at alternative investment management firm Hamilton Lane, says that while it can be easy to get “worried” about too much dry powder, a reduction in spending might actually show that fund managers are “being responsible and being cautious in their investment pacing.”

Even with more capital on the sidelines, private equity firms are predicting steady, if slightly lower, fundraising in 2020. And that’s despite the markets nearing, or having already reached, peak levels. (Hirsch, for one, thinks “we probably peaked a year or two ago.”) The capital raised by 2019 vintage funds (or those that began investing last year) totaled around $465 billion, according to data compiled by Bloomberg.

But cash will keep flowing, firms say. A few areas investors are eyeing to allocate their capital? Technology, according to Bain Capital’s Loring. It’s “pretty frothy,” he says, and will continue to be so in 2020. M&A in the private markets will be strong too, he adds.

Others like Hamilton Lane’s Hirsch see investors flocking to private credit strategies in further search of yield, while investors appear to be pivoting out of areas like energy.

And some analysts predict the trend of growth equity investing continuing into 2020, as maturing private companies (those too mature for late-stage venture) may opt for later growth funding instead of an IPO. The increasing popularity in growth equity (the number of U.S. growth equity deals has steadily risen from 2009 to its peak in 2018, totaling $57.6 billion across over 1,000 deals that year) has prompted many GPs (general partners) like Blackstone to create growth funds, according to PitchBook.

Choosing ‘flavors of ice cream’

Although cash in private markets is around all-time highs, there isn’t a shortage of places to put it. And as private equity balloons, the opportunities in its asset class expand with it.

Of note, areas like non-performing credit, senior loans, and an ever-growing geographic presence outside of the U.S. and Europe are just some of the ways private equity is offering a widening umbrella of options for investors, which Hirsch suggests is helping “absorb” all that extra capital.

“I analogize it to the number of flavors of ice cream,” Hirsch says. “The number of flavors of ice cream that are available to investors has gone up significantly.”

And clearly appetite is not a problem.