Amid all the financial confusion, one things seems clear enough: the days of the $10bn plus leveraged buyout are gone for now.
Even when the backlog of unsyndicated high-yield loans held by banks is cleared – which now looks like will happen fairly quickly – they are not going to be rushing back to the private equity funds to offer new multi-billion facilities.
The reason for that is not simply that they have been burned by the events of the past year. More concretely, they can no longer package up mezzanine and secured debt for buyouts and transform it into collateralised loan obligations (CLOs).
This was the unanimous conclusion of a panel on private equity this morning at the Milken Institute Global Conference, which included Leon Black of Apollo Advisers and Thomas Lee of the eponymous private equity group.
In the era of the giant private equity deals, such as the $45bn takeover of TXU, the Texas-based utility, that was announced in April 2007, private equity funds easily obtained enormous debt commitments from banks.
In contrast, Mr Lee described a recent conversation with the head of one bank, who told him: “Our balance sheet is wide open for you, but for deals $1bn and down.” It was “back to the future” for private equity funds, he said, on mid-cap companies at which they see an opportunity to improve management.
The estimated $300bn backlog of leveraged loans from past deals that have been sitting on banks’ books has been reduced by half by banks selling the loans at a discount to investment funds. But their capacity to lend is nonetheless impaired.
Just as the collateralised debt obligation market has been hammered by the subprime crisis, investors are now shying away from investing in the CLOs that allowed banks to originate and sell lots of debt. On one estimate, 70 per cent of bank debt was being syndicated via CLOs just before the credit squeeze.
“I am not sure the banks will be lending in these quantities until the CLO market comes back and I do not think it is coming back fast,” said Mr Black.
