What can lead to capital overhang for private equity firms?

Capital overhang occurs when a private equity firm raises more capital than it can effectively invest in suitable opportunities. This situation typically arises when a firm successfully garners commitments from investors but struggles to identify attractive investments that meet its criteria or produce satisfactory returns. It can create a scenario where the firm has a significant amount of dry powder—uninvested capital—that is not being put to work, which can lead to pressure from investors seeking returns on their committed funds.

Raising capital without appropriate investment opportunities means that the firm is holding onto capital longer than desired, which can negatively impact its reputation and relationships with investors. Investors may become frustrated if they feel their funds are not being utilized effectively, and they may hesitate to commit additional capital to the firm in the future.

The other choices do not contribute to capital overhang in the same way. Investing immediately after fundraising typically implies that the firm is actively deploying capital into available opportunities, thus reducing the chances of a capital overhang. Success in attracting more investors may indicate health and demand in the investment market, not necessarily leading to a capital overhang unless those funds are not invested. Active management of acquired companies generally relates to maximizing returns on existing investments rather than creating a situation of capital overhang, as it focuses on