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Blackstone: Just how different is private equity today?

Blackstone used a rapid-fire trading-style approach in its recent record-breaking LBO. But can we expect disasters comparable to those of the early 1990s?

Blackstone’s leveraged buy-out of Equity Office Properties is a record breaker. Blackstone paid $23 billion for the company and assumed $16 billion of debt in a $39 billion transaction that eclipses the $25.7 billion plus $6 billion in assumed debt that Kohlberg Kravis Roberts shelled out for RJR Nabisco back in 1989 and the $21.3 billion plus $11.7 billion in debt that a consortium of funds paid for HCA last year.

Does such a huge, leveraged deal for a commercial property company flash bright red warning signals of a market top? Certainly the combination carries unfortunate echoes from those Barbarians at the Gates days. Less than two years after KKR closed its era-defining deal, the recession of the early 1990s and rising white collar unemployment threatened a systemic failure in the US financial system where commercial lenders, S&Ls and broker dealers were left horribly exposed to failing highly leveraged transaction and property loans.

Back then, as LBOs – at the time a revolutionary corporate form – started turning sour, a clear pattern emerged. Those deals where the sponsor’s plan to pay back its debts required speedily breaking up the purchase and selling off the pieces tended to hit the wall.

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