Buyout Deals Drop

Number of Buyouts Drops from Credit Crunch

Private equity firms have certainly felt the adverse effects of the global credit crunch, as the number of buyout deals has fallen considerably to a four-year low.

A buyout deal often relies on a large amount of leverage to purchase a majority stake in a company's equity. The current financial market has sharply limited the credit necessary to carry out these buyout deals, and private equity firms have suffered as a result. For the year-to-date, global buyout activity fell by 74% to $180 billion, a remarkable decline that signifies a decline in buyouts not only in the struggling U.S. market but globally as well.

No Credit, No Deal
The major buyout deals made earlier this decade are no longer feasible with banks increasingly hesitant to loan money for potentially risky leveraged buyouts. Private equity firms seem to have resigned to smaller deals for the most part until credit returns to the market. $2 billion is rumored to be the current limit for financing a deal, according to an anonymous buyout executive. This is a far cry from the type of large leveraged buyouts that took place just last year, like the $17.9 billion acquisition of Clear Channel Communications led by Bain Capital and THL Partners.

More Hesitation over Buyouts
It appears that private equity firms are exercising greater caution when considering buyouts as they fear that the worst of the financial crisis has yet to come. This is not to say that there have been no private equity deals this year, but there has been a marked decline in the number and size of deals, and the private equity firms have relied on other sources of capital outside of bank debt. Recently, private equity has transformed from a strong reliance on debt for financing deals to more available resources like the recent private equity takeover of the Weather Channel with funding coming from GSO, Blackstone's hedge fund.

The drop in private equity activity is most prevalent in the United States, where buyout activity has fallen 83.5% to only %61.8 billion year-to-date. Many private equity firms are holding large amounts of capital "waiting on the sidelines" to invest once market conditions stabilize. Some private equity firms see distressed market conditions as a positive, seeking to capitalize on the situation by investing the capital that they accumulated and turn a profit off a seemingly negative economic decline.

Change of Strategy
The large private equity firms have reacted to the crisis by following the age-old investment strategy of diversifying. K.K.R is reaching into alternative investment areas such as real estate and mezzanine financing. Blackstone has similarly expanded into other areas by strengthening its hedge fund arm, strong real estate business and its M&A advisory unit.

The credit crisis is having obvious adverse effects on the private equity world, and many industry
professionals fear that the worst has not been felt yet. However, many private equity firms have been able to survive, and even profit, through creative investment strategies and diverting their focus from exclusively private equity to alternative areas.


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Secondary source: Dealbook

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