Secondary buyout record fuels industry concerns

The volume of secondary buyouts so far this year is already 15 percent higher than the total for the whole of 2006. Many industry observers believe this is a sign that the industry is approaching the top of the current cycle.

Private equity firms have already spent $115 billion buying businesses from each other so far this year, some 15 percent above the figure for the whole of 2006 – lending further fuel to claims that the private equity cycle is peaking.
The volume of secondary buyouts has reached $115.1 billion in the first six and a half months of 2007, according to figures from data provider Dealogic. This is significantly above the $100.2 billion total for the whole of last year, and accounts for 60 percent of all private equity exits this year.

The figures also show that the size of individual deals is increasing – the average secondary buyout size this year has been $528 million, up from $294 million last year. This includes the biggest secondary deal to date, BC Partners’ $16.4 billion buyout of satellite operator Intelsat from Apax Partners, Permira, Madison Dearborn, and Apollo Management.

Many in the industry believe that the proliferation of secondary deals suggests the market is peaking. For instance, Alchemy PartnersJon Moulton told the UK-based Sunday Times newspaper this week: “I’ve always said the boom would end with private equity companies going public and the largest deals being secondary buyouts. That’s happening now.”

Some observers have argued that this situation is a sign of an artificial bubble in the market, where the only buyers able to afford to deal with buyout firms are other buyout firms. Investors have also suggested that an over-reliance on secondary buyouts casts doubt on a manager’s ability to generate primary dealflow and reduces the opportunity for genuine value creation.

The Dealogic figures also reveal that Kohlberg Kravis Roberts has been investing more heavily than any other firm – and by some margin. KKR has announced deals with a total value of £123 billion so far this year, some 25 percent more than its nearest challenger Goldman Sachs Capital Partners, and 40 percent ahead of TPG in third place.

However, rival Blackstone leads the way in terms of loan financing and equity market volumes. It has also paid more fees to banks than any other firm – a total of almost $500 million in the year to date.