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LBOs: Could more mean worse?

The biggest LBO club deals of 2005 will soon be surpassed.

Bankers are confident that the record Kohlberg Kravis Roberts has held since 1989 for the biggest ever buyout – its $25 billion purchase of RJR Nabisco – will be broken in 2006. But that will mean private-equity firms will have to band together with even more of their competitors in club deals.

Although 2005 will be remembered as a watershed year for large, club LBOs, and average deal size was the highest on record, only two buyouts passed the $10 billion mark in 2005 – the $15 billion deal for Hertz and the $11.8 billion one for Sungard. “The Sungard deal opened everyone’s horizons,” says Boon Sim, head of M&A for the Americas at Credit Suisse. “Now deals of $20 billion to $30 billion will come.”

Conditions are certainly ripe for even larger transactions. Leverage multiples for LBOs, in the seven to eight times ebitda range, are still lower than they were in the 1980s. At the same time, individual private equity firms are raising record-breaking new funds. At the beginning of 2005, $3 billion to $4 billion was a big fund, at the end of the year $10 billion was not unusual. In 2006 the indications are that sponsors are going to be raising even bigger funds, with the biggest players raising $12 billion or more.

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