What does the term "market overhang" refer to in private equity?

The term "market overhang" in private equity specifically refers to a situation where there is a significant amount of capital that has been raised by private equity firms but remains uninvested. This excess capital, often referred to as "dry powder," can create pressure on these firms to deploy funds, as investors expect their capital to be put to work. An overhang can impact valuations and competition in the market, as multiple firms may be vying for a limited number of attractive investment opportunities.

The concept is crucial for understanding market dynamics, especially in terms of how it might drive prices up due to increased competition for deals. In contexts where there is a market overhang, private equity firms may find themselves in a position where they have to make investment decisions more quickly or accept potentially lower-quality deals just to put capital to work.