The Capital Bubble

A blip in the in the U.S. private equity market is causing a valuation spike for some middle market companies, creating a flurry of activity among company owners and investors seeking to raise growth capital or to sell their companies outright.

The spike is the result of a bubble of capital that PE firms have at their disposal, but with a “use it or lose it” set  of strings attached by the limited partners who pledged the capital in the first place.

 The roots of the bubble lie in the extraordinary fundraising boom the PE industry enjoyed from 2006 to 2008. During that period, historic PE returns combined with the availability of free-flowing bank debt to create the prospect of attractive future returns.

That in turn caused limited-partner investors to pony up $541 billion in PE commitments in 2006, $657 billion in 2007 and $672 billion in 2008. Those record levels of fund commitments typically were made with a five
year “investment period,” the time frame during which the PE managers could draw on the commitments.

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