Private equity firms have amassed a substantial cash pile of $4.5 trillion. According to Morgan Stanley, this includes roughly $800 billion for alternative asset managers within its coverage, representing about 25% of the average assets under management (AUM).
The bank’s analysts said this $4.5 trillion "dry powder" represents significant purchasing power, equating to approximately $9 trillion.
Despite a subdued period of deal activity, Morgan Stanley said private equity managers are increasingly optimistic and ready to deploy this capital, highlighting four key themes.
1) Expanding Across Private Credit: Private equity managers are stepping into the lender-friendly backdrop with attractive risk/reward opportunities, analysts noted.
This includes asset-backed finance and various forms of bank partnerships.
“We continue to see opportunities emerging with banks from asset portfolio sales, regulatory capital trades, and forward flow arrangements,” they said in a note.
2) Acting as Capital Solutions Providers: Firms are bringing a range of liquidity solutions to the market, such as LP/GP-led secondaries, continuation vehicles, and hybrid capital. The high refinancing demand has firms providing structured solutions to bridge the gap until rates decline.
3) Stepping into Pockets of Dislocation: Private equity managers are selectively entering areas of dislocation that present compelling valuations, particularly in the challenged real estate sector. According to Morgan Stanley, near-bottoming real estate values offer opportunities in themes like warehouses, student housing, residential rental, and logistics.
4) Leaning into High Conviction Long-Term Themes: Lastly, managers are increasingly focusing on secular themes with resilient growth profiles and long-term tailwinds, such as energy transition, data centers, AI, digital infrastructure, and logistics.
Markets are now undergoing structural changes, like Japan, which is exiting decades of deflation and seeing greater shareholder activism.
“This is incentivizing corporates to re-evaluate their strategic options and portfolio of businesses and may catalyze divestitures of non-core businesses as well as take-privates of public companies,” analysts explained.
Morgan Stanley said it maintains a positive outlook on the long-term growth of private markets, driven by increasing investor allocations, innovative products, and democratization, which are expected to support low double-digit growth in the asset class over the next five years.
“Near-term, we see a cyclical recovery in deal activity that's set to re-accelerate the private markets flywheel driving earnings recovery linked to rebound in transaction and performance fees." This anticipated recovery is likely to improve fundraising efforts due to improved cash flows returning to clients.
Analysts foresee greater opportunities for near-term deployment, fueled by better financing conditions, the need to utilize aging cash reserves, and a growing number of attractive investment opportunities.