C&B Notes

What Could Go Wrong?

Preqin recently estimated private equity’s dry powder stockpile at $2.5 trillion, even as funds invested $256 billion in the first half of this year — a record amount excepting 2007’s outlier.  Compounding the purchasing power of this equity, leverage continues to rise with now over 50% of deals financed with more than six times annual EBITDA.  Valuations have responded as one would expect.

Deal appetite at leveraged buyout shops such as KKR, Blackstone and Brookfield has been fuelled by the enormous pile of so-called dry powder, which they have raised from pension and sovereign wealth funds and not yet spent, and by still-cheap borrowing costs that make it easy to finance takeovers.  Data provider Preqin estimates $2.44tn of dry powder is at the ready to buy companies, real estate, infrastructure, natural resources and debt.  Tens of billions of dollars more are being raised for new funds, giving private equity groups even more dealmaking ammunition…

“Deal volume in private equity has been very good.  A number of transactions have kept the machine going,” said Simona Maellare, the global head of financial sponsors at UBS, the team that advises and finances private equity deals.  “I expect the second half of the year will follow the same pace of the first half. Deals can be financed, competition for assets is vivid, everyone has a lot of money.”  The build-up of capital has prompted leveraged buyout shops to get more aggressive in their takeovers.  Leverage levels are rising on deals, in part thanks to a more relaxed attitude from US regulators, and the takeovers themselves have become larger.

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