This morning, DealBook sends me to the Financial Times' latest article bemoaning the future of private equity and wherein I learn that "if one assumes that 80 percent of a buyout deal is leveraged, The FT
hazards a guess of an astonishing $1.485 trillion in capital available
for private takeouts." Well, I'd love to be able to get debt at 5:1 on my equity with some regularity, but it doesn't work out that way, really.
The FT calls the backlog of "uncalled capital" something like $297 billion. I'd be more comfortable assigning a 4:1 debt to equity ratio which suggests $1.188 trillion in available buyout capital. But that is neither half a billion here, half a billion there. The FT goes on to point out, however, that the former sum is something like 12% of the market cap of the S&P 500. It also pegs the "average spread on high yield bonds" at 350 basis points, that seems sort of high to me, though FT's terms are not defined here. Concludes the FT:
By necessity, buy-outs must now be less selective. Investors can either own public equity or invest in funds that must pay large takeover premiums to own public equity – and which charge meaty fees for the privilege. If less discriminating buy-outs are the future, it is probably best to be on their receiving end.
Well, we forgot about the option to invest in funds that buy private firms, echoing the increasingly common treatment of "private equity" as purely "going private" related.
And try as I might, I still cannot get that worked up over buyouts that manage to snag assets for under 8.00x EBITDA (HCA).
All this is neither here nor there, however. The real story is in the first reader comment on DealBook however, which finishes off with this gem from Mark Klein, M.D.:
"Too bad for us for the Baby Boomers and their progeny who govern today in their elementary schools sex education replaced thrift lessions."
Reminding us that one of the greatest conceits in the United States is the continuing demonization (or praise) of politicians conducted under the denial-laden belief that their monetary policy (and indeed their position on sex education in schools) actually influences the economics of things such as buyouts in any substantial way anymore.
(Art: "Tombstones in Whitby," Paul Townend, c. 2005)
[Edit: A watchful Dartmouth alum and Going Private Reader writes: "FT: does not suggest a 5:1 debt to equity ratio, but rather 4:1 (~300b = 20%, ~1200b=80%, ~1500b = 100% of buyout capital). 5:1 would = a 16.7% equity injection. Your sentence should read: 'I'd be more comfortable assigning a 3:1 debt to equity ratio which suggests $1.188 trillion in available buyout capital.'" Of course, our Dartmouth alum is exactly correct. Going Private regrets the error.]
