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Why Big Buyouts Lack Lustre: Analyst‘s View

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May 2, 2013

Despite some high-profile mega-buyouts announced this year, the private equity industry’s capacity for leveraged buyouts continues to decline (see graphic). Some reasons for this trend are provided by SoberLook blog.

  • Difficulty finding the exit – reducing PE fund capacity for redeployment in new funds or in some cases for recycling in existing funds.
  • Fundraising slowdown – even established managers have increasingly difficult time raising the same amounts of capital they did in earlier funds. Large institutional investors have been cautious on private equity due to liquidity constraints they encountered in 2008 as well as poor return expectations for the whole sector.
  • Pensions are shifting from defined benefits to defined contribution pensions – slower growth in defined benefits accounts limits the overall demand for private equity, says SoberLook, making fundraising for LBO shops enormously challenging in an already competitive environment.
  • Co-investment trend squeezes mega-fund managers-  Major investors are less attracted to mega-fund and if they do invest in large LBO funds, they often demand to directly co-invest with these funds on buyout deals, says SoberLook. Some years back when deals were too large for a single fund, LBO firms would call each other to club on transactions. Now they call their investors to present co-investment opportunities, but those investors have limits to how many deals they can do. (Image source: Preqin via SoberLook)
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