The equity market is dull and M&A patchy but private equity is on fire. Barely a week goes by without a landmark deal. What is especially striking is the amounts private-equity houses have been able to pay for their targets. And that is a function of how much they have been able to borrow.
A consortium of private-equity houses has just paid e3.7 billion for French retail group Pinault-Printemps-Redoute's Rexel subsidiary, equivalent to 11 times its ebitda. Moreover, it funded the deal with debt equal to almost seven times the underlying earnings of the business. In another transaction, Apex and Cinven paid e2.1 billion for Dutch media company VNU's directories business, borrowing seven times its ebitda.
In the third quarter of 2004, 57% of big leveraged buy-out deals were financed on leverage multiples of five times or more, according to Standard & Poor's. Not since 1998 – when the near-collapse of hedge fund Long-Term Capital Management triggered a credit crunch – have so many deals been done on such high multiples.
Is this an ominous sign? The industry says it is not taking on too much debt. Firms point out that interest rates are much lower now than six years ago, so companies can support bigger debts.