Has boom in going private hit its peak?
Signs are appearing that private-equity groups may be having more difficulty making deals.
from the June 25, 2007 edition
Page 2 of 3
Kohlberg Kravis Roberts & Co., another private-equity firm, owns Hospital Corporation of America; Sealy, the bedding company; and Toys "R" Us.
But the climate for such dealmaking may be changing.
So far this year, the number of mergers and acquisitions has exceeded $2 trillion, up 57 percent compared with the same period last year. "But we were up 67 percent through the middle of May," says Mr. Stovall. "One reason could be these deals are becoming more costly, and that has resulted in deals not getting done."
The deals are getting more costly because long-term interest rates are rising. "The private-equity companies borrow money in huge amounts," says Axel Merk of Merk Investments in Palo Alto, Calif. "As rates move higher, the deals they do become less attractive."
At the same time, lenders have become more selective after the subprime mortgage market – which offers mortgages to lower-quality lenders – had large losses. "There has been a reprising of risk," says John Mousseau, vice president and portfolio manager at Cumberland Advisors in Vineland, N.J.
The risk of investing in private-equity funds and hedge funds was the subject of a letter written to the chairman of the Securities and Exchange Commission by Reps. Dennis Kucinich (D) of Ohio and Henry Waxman (D) of California.
"The value of public investors' interests in Blackstone LP would be tied to the performance of the underlying hedge and private equity funds, which have not been considered suitable investments for the general public because of their high risks and speculative nature," wrote the two congressmen, who urged the SEC to delay the Blackstone initial public offering that took place last Friday.
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