Growth and Current Environment

class="textPage">Private equity funds grew from modest levels in the 80’s and 90’s until it peacked in 2000. For the next two years activity has been low until 2003. In 2003 buyouts raised 64bn USD in 04 this has risen to 95 Bn USD followed by 156 Bn USD in 05 and 189 bn USD in 2006. By mid April 2007 there were 205 buyout funds marketing more than 200 bn USD.

class="textPage">From 2001 to 2006 Europe has been the most popular buyout market with 268 billion euros worth of deals. In 2006 they had a record of 134 bn euro of deals compared to 16 bn euros 5 years earlier. Big private equity firms came to Europe because they saw that competition was less and opportunities were higher.

class="textPage">Buyouts were fuelled by the 172 billion USD of new funds worldwide. Blackstone raised 15.6 billion USD to create the world’s biggest private equity fund. What is interesting is that until last year few private equity deals in excess of 1 bn USD have been raised. In the first quarter of 2005 buyouts comprised of 9.6% of all M&A deals. There are two variables that could have contributed to this rise. The first one is that private equity deals and performance are strongly correlated to the return and turnover of the stock market.

class="textPage"> As stock values drop pension fund assets are worth less and therefore have less capital to invest and vice versa. The other contributing factor has been the legislation of the Sarbanes-Oxley act. This act has been established after the Enron scandal. Its purpose is to hold senior management accountable for lies and corporate fraud to a stricter degree than how it was in the past. This means that there were stricter rules with regards to auditing of public companies. Private companies were not under these new enforcements which gave incentives for private takeovers.

class="textPage">2007 is a record year with world’s largest buyout, the 44bn USD acquisition of Texas Utility. This deal broke previous records such as Equity Office Property which was bought for 38 bn USD by Blackstone and HCA Hospital for 32 bn USD by KKR. These three deals which were completed within 18 month and was the first time in 17 years that beat the size of KKR’s RJR Nabisco deal.

class="textPage">Analysts estimate that 100 bn USD deals would soon be possible. Private equity groups collected more than 400 bn USD of funds last year and that figure is expected to grow to 500 bn according to Private Equity Intelligence. What is interesting is that once leverage is taken into account their exposure runs into trillions of USD.