BreakingViews, published in the Wall Street Journal, has made a case that the amount of money from private equity going into buyouts is rising so fast that exiting the deals will be very difficult.
The theory of BreakingViews is that private equity firms raised $320 billion last year. With debt that can be taken on in buyout deals, the capital available rises to $1.6 trillion. If a third of those deals make it to the public markets via IPOs, that is $500 billion that the market would have to absorb. In 2006, total global IPOs were less than half of that, so private equity may have a problem getting a return on its invested capital.
What makes this point of view inaccurate. First, the IPO market in the next two years may be much more robust that in 2006. "Given increased level in leveraged buyout activity…we believe that the outlook for potential IPOs is fairly robust," Wachovia analyst Douglas Sipkin said in a note this week. "Assuming it takes about two years for a private equity firm to turn its portfolio around and spin it back to the public should provide a significant IPO pipeline."
The other, very important point is that just because private equity firms raise money, they may not put its to work quickly. According to MarketWatch of the $500 billion in private equity funds raised in the last two years, only 32% has been invested.
The risks in private equity firms getting their capital back out of deals may not be nearly as great as some would assume.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
Top Gaining Stocks
Top Losing Stocks