Friday Letter No time for turkey

For anyone who wasn’t quite convinced: the anticipated pick-up in LBO activity has arrived.

Yesterday – when most people in the US were celebrating Thanksgiving by feasting on turkey and watching the New Orleans Saints beat the Dallas Cowboys – Kohlberg Kravis Roberts took advantage of the US stock market holiday to reveal the largest take-private of 2010, a $5.3 billion LBO of Del Monte Foods. So no rest for the wicked – private equity journalists had to put their knives and forks aside and get on the phone to those dealmakers at KKR.

Apax Partners, too, announced a multi-billion US deal yesterday, agreeing to purchase Advantage Sales & Marketing from its previous private equity sponsors.

The two transactions unveiled on the US holiday came after a string of similar multi-billion deal announcements from private equity firms in recent weeks. In late October, The Carlyle Group spent $6.5 billion on two transactions in one week (and has announced several other deals since). TPG teamed with Leonard Green earlier this week on a $3 billion take-private for J.Crew, the clothing retailer it previously took public in 2006.

The rebound in deal activity, however, is not limited to the mega-firms, nor to the US for that matter. Ninety-five US buyouts have been announced in the fourth quarter alone, and 81 in the same time period in Europe, according to data provider Dealogic. Year to date, the value of deals done in the US has soared past last year’s totals, even though fewer deals have been done: 497 deals worth about $80 billion this year, compared to about $50 billion across 518 transactions last year. Europe, meanwhile, has recorded nearly double the deal value this year as compared to last, with 580 deals valued at about $65 billion, compared to about $40 billion across 525 deals last year.

This pick-up in activity, particularly as the year has progressed, was not exactly an unexpected development. Market participants had been predicting a sharp increase for a number of reasons. One is that 2008 and 2009 were so lacklustre; 2010 simply had to be better.

But the principal factor has been the resurrection of leverage.  As we pointed out back in July, it is clear that debt market momentum is building back up from crunch-period lows, more quickly in some regions and sectors than others. That has allowed GPs to start executing fresh deals, as well as refinancings for existing portfolio companies.

It’s not surprising to have what feels like a surge in buyout activity: to many market participants it is simply a return to normal activity levels. Our sources say the trend is likely to continue into 2011. For GPs and their investors, this is of course a good thing – provided the post-crisis acquisitions are getting done at sensible valuations.

Already critics worry that debt terms are too quickly moving back to bubble territory with soft covenants governing loans and debt-to-equity ratios creeping back up. In the long run, this cannot be good for asset pricing. So be sure that LPs are watching developments closely. As ever, they are at the mercy of their managers doing the right thing.