Overhang in the Healthcare Equity Market

I have pointed out for a long time that there is a growing level of overhang (excess liquidity) in private equity markets. This has led to speculatory behavior in certain “hot” sectors, such as healthcare, as discussed in this post by Bobby Guy at a new blog by Waller Lansden law firm.

Now, it seems money is available everywhere. Many specialty lenders focusing on the healthcare sector have been birthed in the last few years, and hedge funds and private equity funds focusing on the healthcare sector have exploded. Even with interest rates rising, money continues to be available at historical levels. It was recently reported that there is enough money in hedge funds to take the entire NASDAQ market private—twice. Credit derivatives contracts (agreements that divide up risk, either by using pools or through swaps) are worth more than nine times global gross domestic product. A month ago, I talked to a fund with almost $100 million to invest in the next three months, and if it did not meet its three month deadline, all money would have to be returned to investors to chase yield elsewhere.

This is getting to be a worrisome equity market in my opinion. And Mr. Guy agrees:

For the moment then, easy money is “hip” and cool. No one knows how long the current wave will last, but it is fresh wind in the sails of the healthcare market compared to the doldrums of 2001-03. Remember that inevitably, as with all financial cycles (and bubbles), this one too must turn (burst) . . . but maybe not yet.