What does "capital overhang" refer to in private capital?

In the context of private capital, "capital overhang" refers to money that has been raised by a private equity or venture capital firm but has not yet been deployed into investments. This situation often arises when a firm raises a significant amount of capital from investors, but due to various factors—such as unfavorable market conditions, a lack of suitable investment opportunities, or strategic pauses in deal-making—the firm has not yet called or invested that capital.

The existence of capital overhang can indicate a holding period where the firm is assessing the market or waiting for better opportunities. This can have implications for the firm's performance and the expectations of its investors, as the returns on the uninvested capital remain unrealized. Essentially, while the firm can show a strong capital base and committed investors, the inability to put that capital to work can create challenges and pressure to find suitable investment opportunities.

Other options do not accurately capture this concept. For instance, low return investments, funds allocated for future investments, and fully invested assets do not reflect the idea of capital being available but not yet used, which is what "capital overhang" directly addresses.