Investment Markets » Banking and Finance
How Much Of A Threat Is Private Equity?
Private equity deals are breaking new records but the boom is in danger of becoming a bubble.
A threshold has been crossed. The private equity industry has been a hovering presence among the middle ranks of British companies for some time, but hitherto the blue-chip giants of the FTSE 100 seemed immune. No Longer. Whether or not the attempt to acquire Sainsbury's succeeds, it is clear there are now almost no deals that are off limits.
The game – as far as mergers and acquisitions investors are concerned – consists only in spotting the top targets. In the short term there are profits to be made, but if private equity firms continue their apparently unstoppable ascent, the future for London's stock exchanges looks bleak.
As all the choicest assets are bought up... we are left with an increasingly eclectic mix of overseas mining stocks, dodgy software providers and online betting firms.
No wonder alarm bells are ringing. It isn't just the growing firepower of private equity firms that is causing concern, but their lack of transparency. As one union leader remarks: "They are like a global vacuum cleaner, hoovering up assets at any price, anywhere, any time. We want to bring them out of the shadows."
In fact, the British economy has a great interest in keeping the private equity train rolling for as long as possible. Buyout firms already employ one in five private sector workers and, contrary to their reputation as asset-strippers, the best manage their companies we, turning round ailing firms.
Even so, there are alarming signs that the boom is becoming a bubble. The sector has raised record sums this year, triggering an unprecedented rush for assets, and paying so much that a miracle would be required to generate a proper return.
Private equity is only able to play this game because the world is sloshing with liquidity, but what is really fuelling the bubble is the huge leveraged loans investors are taking out to finance deals. The banks protect their backs by syndicating out these loans to third parties, but playing pass-the-parcel is becoming harder, and if there were a crash they could be left holding some pretty hot potatoes.
The smart operators are aware the party can't go on forever, but there's no obvious reason why it has to end now. There may be kindling on the forest floors, but where's the spark that's going to ignite it? The snag is that, as time passes, more kindling accumulates. When the conflagration comes, it could be dramatic.
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