The fate of the mega-deals

This year marks a significant anniversary for the financial services industry: in September, it will be five years since the notorious collapse of Lehman Brothers – which triggered global banking meltdown, torpedoed credit markets, pushed many countries into recession, and precipitated the sovereign debt crisis that still holds Europe firmly in its grip. It’s unlikely there will be a party.

2013 also represents a milestone year for private equity. Between 2006 and 2008, the industry was at its zenith: cheap debt and abundant LP capital fuelled nearly all the largest deals ever done by private equity. Most of these deals were done in the US, peaking in 2007 with the $44 billion buyout of TXU Energy by Kohlberg Kravis Roberts, TPG and Goldman Sachs (which remains the largest private equity deal to date); in Europe, the high point was KKR’s (slightly more modest) £11 billion buyout of pharmacy group Alliance Boots. Not only were the sums of money enormous, but the multiples paid were at times also eye-watering, as buyout houses battled with large corporations and each other to take businesses private.

What’s significant about 2013 is that all the mega-deals done during the boom years of 2006-08 are now five to seven years old – the standard length of time that private equity managers typically hold a business while they seek to improve operations and work towards a profitable exit.

Perhaps the main reflection is that things could have turned out a lot worse. The ensuing downturn sent sales at companies tumbling, destroying billions of dollars of value across private equity portfolios – a fact that became horribly clear to many investors in the coming years. But despite the gloomy predictions at the time, few of the largest companies bought during that period have collapsed. Nor have 20-40 percent of the big buyout groups disappeared, as Boston Consulting Group predicted they would in 2008.

“I think there was a lot of criticism levelled at the larger players for the prices paid and the leverage put into structures over that period. But I don’t think it’s all necessarily going to end in tears,” says Billy Gilmore, investment director at Lloyds Banking Group’s asset management arm SWIP.