Editor's letter

2005 is drawing to a close, and the private equity industry is looking back on a year filled with superlatives. Deals closed, debt raised, new funds formed, balance sheets loaded – you can look at the buyout business from many different angles, chances are you'll come across a new record figure set at some point during the past 12 months.

To pick just one example: as we take this, our 41st edition since launch, to the printers, the market is still digesting news that TDC, the Danish telecommunications company, has finally joined the ranks of private equity-backed companies in Europe. At €12.8 billion, the deal weighs in as Europe's largest LBO ever completed. But perhaps even more astonishing than TDC's size is the fact that it is just one of many European mega-deals completed this year – and it may not be long before an even larger sponsored purchase comes along. Private equity really is on a wild ride right now, and most industry augurs predict that it will carry on well into 2006.

Investors, meanwhile, are pondering just how profitable the current vintage of buyout funds will turn out to be. Can money be made from a €12.8 billion LBO? Can money be made at all in an environment this competitive? When will the capital invested today be returned to investors, and how should it be reinvested when the time comes?

It's crystal ball stuff, but then investors with exposure to this asset class would be bad fiduciaries if questions about the future weren't keeping them awake at night. Definitive answers are of course impossible to come by, but architects of private equity fund portfolios are duty bound to work out the most probable scenarios. As this month's cover story explains, both art and science are required to do this well. Specifically, savvy LPs will combine the art of conversation with GPs in order to extract clues about the anticipated value of their investments with the science of statistics to model future cash flows.

Ultimately any forecast of this kind will turn out to be wrong. However, as private equity risk-taking approaches a cyclical peak, the challenge lies in getting it as right as possible.

Enjoy the issue and the new year,

Philip Borel

Managing Editor