Capital Markets

Are LBOs Back?

Private-equity funds are getting bigger and doing larger deals. Indeed, no target's untouchable, according to the co-founder of Carlyle Group.
Stephen TaubMarch 30, 2005

Are private-equity funds staging a comeback?

Seems that way. Pension funds and other large investors are pouring money into these private pools of buyout money. And these funds are putting the capital to work, spearheading some of the biggest acquisitions in recent months.

The Wall Street Journal reports that the Washington, D.C.-based Carlyle Group has raised $10 billion, creating the largest leveraged buyout fund ever. Of that sum, $7.85 billion is ear-marked for U.S. investments and another $2.2 billion for European deals, according to the paper.

Altogether, buyout fund managers have about $1 trillion in capital available to them, according to the Journal. Upshot: Some of the largest corporations could wind up going private. “Nothing is off the table now,” Carlyle co-founder and managing director David Rubenstein told The Journal.

Meanwhile, even more money could soon be streaming into these buyout pools. The Journal reports in a separate story Monday that Mississippi has become the latest state to allow its state pension fund to invest in private equity or other so-called “alternative” investments.

Under a bill signed last week by Mississippi Gov. Haley Barbour, the Public Employees’ Retirement System of Mississippi can invest up to 10 percent of its money, or around $1.7 billion, in asset classes other than stocks, bonds, or real estate, provided the investments are in the form of limited partnerships, commingled funds or separate accounts, according to the newspaper.

Last month, New Mexico’s state legislature approved a similar bill, allowing its two public pension funds to invest in private equity

Buyout funds typically use borrowed money to take over a company. They then often cut operating costs at the acquired business, sometimes selling bits of the operation to help service the debt taken on to fund the acquisition. Other times, private-equity firms use a business as a “platform,” combining the company with other similar companies. The buyers eventually cash out for a much higher price than they paid for the original equity.

As reported yesterday, Silver Lake Partners led a group of buyout funds that agreed to buy SunGard Data Systems Inc. for $11.3 billion, the largest private-equity deal since Kohlberg Kravis Roberts’s $25 billion leveraged buyout of RJR Nabisco in the late 1980s. KKR is a participant in the SunGard deal.

The SunGard acquisition may prove to be a watershed in the private-equity sector. First off, the bid for the software and data specialist was put together by seven firms. What’s more, private equity firms have tended to shy away from purchasing software companies. Such businesses rarely have predictable revenue streams, and their assets are mostly intangible.

The Journal points out, however, that these financial-oriented buyers are warming up to tech companies that derive more of their revenues from providing services to corporations.

Earlier this month, KKR, Bain Capital LLC, and Vornado Realty Trust agreed to buy Toys “R” Us Inc., for $6.6 billion. That deal may be on hold, though: a union pension fund has filed a suit to stop the acquisition, claiming the purchase price does not reflect the true value of the toy retailer, and, in particular, its real estate assets.

Meanwhile, KKR may also buy a majority stake in General Motors Corp.’s GMAC Commercial Mortgage subsidiary for at least $1 billion, according to The New York Post.

Currently, Goldman, Sachs & Co. is the only Wall Street bank that maintains an in-house private equity unit. The other white-shoe firms have spun off their private-equity operations. Why? Reportedly, managers at the Wall Street firms worried that their private-equity businesses might alienate investment banking clients who operate their own private buyout funds.

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