The barbarians are no longer at the gates, or at least at the gates of the largest companies in the U.S. Fortune reports that today’s big private equity managers may be unable to afford dozens of large companies that were once within their reach.
The article traces back four years to when Fortune put Blackstone CEO Stephen Schwarzman on its cover, dubbing him the “King of Wall Street.” Back then, scarcely a week went by without one of the private equity titans reporting a buyout of corporate America’s most recognizable brands. One newspaper even suggested that PE firms might snap up Microsoft.
It’s a different story today, largely due to the credit crisis. Citing a survey by Coller Capital, they found that the big source of PE fundraising – institutions, pension funds and endowments – now view big North American private equity buyouts as not delivering enough “bang for the buck.” Ditto for big buyouts in Europe and Asia. (Although there is still optimism among investors for buyouts in the mid-market ($200 to $999 million) and small-market (less than $200 million) ranges.
As a result, even the top PE firms in the industry have had trouble raising funds. Blackstone raised only about $15 billion for its most recent fund. Still sizable, but far below the $24 secured last time. Other big firms face similar headwinds.
Fortune crunched the numbers to illustrate. Even if the seven largest private equity funds worked together to raise one giant fund, what they would raise might be in the neighborhood of $12 billion. Add in the leverage typically used in large deals (39%) and that still only nets roughly $29.5 billion of equity and debt.
That figure leaves 174 publicly-listed companies in the U.S. with bigger market caps, and thus, out of reach. Oh, and as for Microsoft at $223 billion? Don’t even think about it. Or a host of other companies, such as Boeing (BA), CVS Caremark (CVS), Home Depot (HD), Oracle (ORCL), and UnitedHealth (UNH).
It means the shareholders of the largest U.S. companies can’t expect a white knight to come riding in and reward them with a private equity buyout-sized bump in their share prices. They’ll have to settle for dividends and steady revenue growth instead.
What’s your take? Will the new, more constrained environment for private equity funds put a dent in dealmaking overall? Or just shift things to mid-market and smaller companies? Add your comments below.
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