Important election years are notoriously difficult times for financial institutions and investors to make long-term decisions. There is simply too much uncertainty associated with a potential change in the Administration or a shift in party control of Congress. Investors like certainty. But there is one thing that investors like more than certainty—returns. Right now investors are sitting on one of the largest stockpiles of cash in history and they are waiting to deploy that cash if the right investments are presented to them. For some investors—your company may be the perfect opportunity.
According to Preqin, a leading financial data and intelligence company, private equity firms currently hold in excess of $430 billion in capital ready for investment. When private equity firms receive capital to invest, it comes with an expiration date. Most funds have a lifespan of five to six years. This means that such firms must find an investment, deploy the capital and liquidate the investment (hopefully with a juicy profit) in that time span. Approximately $170 billion of PE capital will reach its expiration date between 2013 and 2015. If PE firms wait much longer to deploy this capital, they risk running out of time to see their investments through to maturity.
In addition to PE firms, non-financial companies are also sitting on a mountain of cash. According to Moody’s Investor Services, these companies have in excess of $1.2 trillion in capital ready to invest. Approximately $700 billion of this cash held by U.S. corporations is maintained outside of the U.S. for tax and other reasons. This leaves $500 billion for domestic investment. Technology, healthcare, energy and consumer products company control nearly 60 percent of this cash. These sectors rely on growth through innovation, which means acquisitions and investments in promising companies are required to maintain long-term success.
Sovereign Wealth Funds
The largest concentration of capital for deployment is held by sovereign wealth funds, which at the moment control approximately $4.6 trillion in capital, a 50 percent increase over the past four years. Sovereign wealth funds source the capital from the cash reserves of the governments they represent. Asian and Middle Eastern countries control some of the largest wealth funds in the world. In recent months many of these funds have stopped investing in European government securities, increasing the pressure to find new opportunities for investment. While it is unlikely that the China Investment Corporation will take interest in your company, they invest in other investment funds which may indeed be interested.
Venture Capital Firms
When compared with the previous sources of capital, the $7 billion invested by VC firms last quarter my seem like a paltry sum, but this capital was deployed to nearly 900 companies with $1.1 billion going to companies receiving outside capital for the first time. This type of investor feels the same pressure as the others to find investments. Unlike the other sectors, they are primarily targeting high-risk, high-reward opportunities making them appropriate financial partners for only a limited number of companies.
The Bottom Line
If your company is considering expanding, there are plenty of deep pockets waiting to fund opportunities that are a good fit. Dedicate time to understanding the risk and return profiles, the industries and the scale of companies that different investors seek. Then focus your efforts on relevant targets. Why wait until 2013 when the money is there now?