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News analysis: May capital calls slow to trickle

New data from State Street shows that the month just passed was among the quietest in a decade by way of new deal activity, but may confirm the view that the market is ‘bouncing along the bottom’.

General partners managing some 1,500 private equity funds drew down only $3.1 billion during the month of May, according to data from State Street’s Private Edge Group.

The May capital calls are lower than both March and April of this year, and pale in comparison to September of 2008, during which $24.8 billion was called down by the funds tracked by State Street.

The only weaker month within the past eight years was February of this year, during which $2.9 billion in capital draw downs  took place. March and April saw $5 billion and $4.3 billion in draw downs, respectively.
The May data may confirm a suspicion among many dealmakers that the private equity market is “bounding along the bottom”. If this proves accurate, it will be taken by some as a signal the deal market is stabilising – an environment in which buyers and sellers can more quickly come to terms on value and begin transacting again.

A useful gauge of capital call activity provided by State Street, which manages the State Street Private Equity Index service, is draw downs as a percentage of committed capital. In May, draw downs equaled just 0.22 percent of committed capital. In February, draw downs were 0.21 percent of committed capital. In more robust times, monthly draw down figures are typically well over 1 percent of committed capital. The May figures further confirm studies that show a significant “overhang” of unused capital commitments in the market, or “dry powder”.

Some market commentators have worried the weak deal activity is disguising a potential problem – LPs not having enough cash and/or portfolio allocation to meet a coming uptick in deal activity.