With banks stuck holding about $200 billion of unsold debt, the leveraged buyout market has become a shadow of its former self. Deal flow is down, with only 39 transactions in the first two months of this year, and it is unlikely that large buyout firms will be able to fund leveraged deals in the traditional way at any point over the next 12 months, perhaps longer.
Not only is the volume of LBOs dropping sharply – with deals being forced into postponement and even cancellation, such as the acquisition of Alliance Data Systems by Blackstone – but the secondary performance of debt taken on by private equity on recent large LBO deals is alarming. Debt issues that funded Apollo’s $8.5 billion takeover of Realogy and Cerberus’s $7.4 billion purchase of GMAC were both trading at around 61 in March, and these numbers are by no means uncommon. The effects of the downturn in the financial markets and the uncertain future of the real economy are being felt acutely. "People are now even less hopeful about a short- to medium-term recovery in the credit markets," says a private equity analyst. "We’ve seen a precipitous fall-off in LBOs and nothing to suggest a short-term recovery."