Could the mountain of ‘dry powder’ be too much of a good thing?

Alternative investments continue to generate significant attention among institutional investors. But the warning alarms have sounded for fund managers. The problem: There are more investible funds with fewer good enough ideas. Those factors may force managers to accept lower returns.

Pitchbook data shows humongous amounts

According to PitchBook, between 2009 and 2018, over $3 trillion moved into private equity and venture capital funds globally. Of this amount, PE accounted for $2.6 trillion.

The situation is likely to get worse. The giant Government Pension Investment Fund of Japan, with $1.5 trillion in assets, said recently that losses from the public markets were forcing it to increase its allocation to alternative investments.

US pension funds have reported stark outperformance in their private holdings compared to those in the traditional markets. They too may increase their investments in private markets.

Previous research of buyout funds and alternative investments

In 2015, research by economists Robert S. Harris, Tim Jenkinson and Steven N. Kaplan showed that post-2005 vintage year returns were roughly equal to those of public markets.

Due to the flood of inflows into private equity funds, “overall, these results suggest that an influx of capital into buyout funds is [tied to] subsequent performance,” the economists said in their analysis.

Could this happen again when so much money is chasing fewer investible opportunities in the alternatives arena?