LBO Outlook Is Bleak From Davos

Jan 23 2008 | 12:11pm ET

These are anxious times for private equity executives on the ski slopes of Davos, Switzerland.

A pair of high-profile buyout chiefs warned that the subprime mortgage market collapse and ensuing credit crunch will make it hard to finance big deals in 2008.

“Today, a pure buyout of $40 billion to $50 billion is not likely because the debt markets aren’t there,” Carlyle Group founder David Rubenstein told Bloomberg News at the World Economic Forum. “2008 will be a slower time to do larger buyouts.”

That’s because banks have a huge backlog of unsyndicated loans they need to “purge” before funding new leveraged buyout deals, according to John Snow, chairman of Cerberus Capital Management. Banks need to sell some $200 billion worth of existing loans before the pace of LBOs will approach last year’s record levels.

“The whole market for transactions has slowed down some and will continue to slow down until the big thaw takes place,” the former U.S. Treasury secretary said. “We are seeing a slight thawing but credit markets are still tight. There’s a lot of paper still not priced yet.”

Rubenstein indicated that Carlyle would focus on making minority investments, acquisitions in emerging markets, other asset managers—expecially hedge funds and real estate managers—and “artificially depressed” sectors of the economy while the credit crunch stymies bigger moves.

“Financial services companies are particularly beaten down, and they’ll probably see a lot of private equity activity,” he said.

Rubenstein also held out the prospect that p.e. firms will seek to go around the big banks, looking to sovereign wealth funds to pick up the slack.

“Sovereign wealth funds have enormous amounts of money, they buy fixed-income instruments as well as equity, and it's quite possible they can provide debt for some of these large buyouts if they chose to do so,” he said.

 


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