What does 'capital overhang' mean in private equity?

The term 'capital overhang' in private equity is best understood as a situation where a firm has raised capital but has not yet identified suitable investment opportunities to deploy that capital effectively. This can lead to a situation where the capital is held in reserve, unutilized, while the firm seeks out appropriate investments.

Typically, capital overhang occurs when a private equity firm has commitments from investors but faces challenges in finding investments that meet their criteria or aligns with their strategic goals. This scenario can have several implications, such as pressure on the firm to find investments quickly, potentially leading to suboptimal investment decisions if the urgency outweighs the quality of opportunities.

The other options, while related to capital management in some aspects, do not accurately define 'capital overhang.' For instance, having excess liquidity for immediate investments describes a different situation where cash is readily available for deployment rather than being unutilized. A strategy for maximizing investment returns and accumulating debt for future investments also focus on proactive investment actions rather than the passive state of holding raised capital without suitable investment opportunities. Thus, the definition provided accurately encapsulates the essence of capital overhang in the context of private equity.