As we approach the end of the second quarter, private equity trends continue to show positive signs, giving high hopes for the second half of 2010 and into early next year.

Near record levels of dry powder have both investors and entrepreneurs poised as overall deal activity continues to climb. The high capital overhang, about $400 billion, will likely lead to a continued increase in deal flow over the next several months.

Smaller and mid-sized funds have seen the strongest growth in 2010. Funds between $250 and $500 million dominated the total number of private equity funds in the first quarter of this year.

Overall deal flow has continued its growth streak, which began in the third quarter of 2009 (Figure 1).  Deals in the first quarter of this year were up nearly ten percent since the end of 2009.

Private Equity Deal Flow (2005 - 2010)

Source: Pitchbook

Small deals have made up the bulk of the deal flow so far in 2010, with deals under $50 million making up 50 percent of the total number. Deals between $50 and $250 million make up the next 35 percent.

The hottest sectors thus far in 2010 have been financial services and healthcare. Both have rebounded well, experiencing strong growth since the 4th quarter of last year. Leverage has also made a comeback, showing significant recovery in recent months.

Overall, the positive signs continue, indicating that the recovery is in full swing. As the year progresses, watch for the capital overhang to decrease as more funds move from the sidelines and into the playing field.