Equity bubble
Is the private equity market beginning to resemble the dot com boom? Yes, according to Andrew Sorkin, author of a New York Times article called "The Great Global Buyout Bubble", (11/13/05). The infusion of capital into the market and the competition between so many well-heeled players is driving up the cost of buyouts at an accelerating rate. And now with the real estate bubble fizzing, getting the big returns (20% or more) that equity investors demand means more is going into buying bigger and bigger companies.
Right now, as Sorkin points out, the litany of name companies controlled by equity firms includes "Hertz, Nieman Marcus, Metro-Goldwyn-Mayer, Toys 'R' Us and Warner Music, to name a few." The equity firms have done well in flipping over companies (through IPOs, sales to industry players, or to other equity firms). Thanks to low interest rates, and the interest from mutual funds, pension funds, and rich investors keep tossing in cash (over $400 billion).
But, according to Sorkin,
here's the rub: In the next there years, to reap returns on all those big name investments they have been making, private equity firms are going to have to sell $500 billion worth of assets. The question is, to whom? Even in the last three years, in as big a bull market as they come, private equity has never sold more than $153.2 billion in one year.
At this point equity firms are biding up every business or business division that comes on the market, and not for $3 or $4 billion deals, but for $10 and $15 billion purchases. A big raise in interest rates or a slump in economy, or especially both, is likely to leave many of these companies with heavily devalued portfolios.
