so where does it end, I'm imagining a one world corporate monopoly...
Growing Funds Fuel Buyout Boom
Already Biggest, Blackstone Pool Will Raise Additional $4.4 Billion as Firms Seek Larger Targets
By JASON SINGER and HENNY SENDER, The Wall Street Journal
Accelerating the buyout boom and putting some of the world's biggest public companies in reach, Blackstone Group has decided to increase the size of the world's largest private-equity fund to $20 billion.
The move by Blackstone, which already had raised a record $15.6 billion for the fund from investors, secures bragging rights for now in an industry that has several other giants looking to create funds of $15 billion or more.
But there is much more than pride at stake: Private-equity firms have been on a tear lately, buying up publicly traded businesses with the intention of making them more profitable -- frequently by aggressively cutting costs -- and then selling them for big gains, either to other companies or to public shareholders via new stock listings. Fifteen out of the top 20 buyouts on record have been announced in the past 18 months, and private-equity firms this year have accounted for 17% of all major mergers and acquisitions.
Now, all but the largest public companies are potential acquisition targets, especially given the growing trend of "club deals" involving multiple private-equity firms. Their increased financial firepower -- aided by heavy borrowing at low rates by companies they own -- has giant buyout firms already eyeing takeover targets with stock-market values of $50 billion or more, say people familiar with the matter.
Investment strategists who compile lists of potential targets in recent weeks have pointed to hardware giant Home Depot Inc., computer maker Dell Inc., and semiconductor maker Texas Instruments Inc. In Europe, investment bankers point to other big names, including Vivendi SA of France, BT Group PLC, the British telecommunications company, or even food giant Unilever, which is based in the U.K. and the Netherlands.
The largest-ever private-equity purchase remains the iconic $25.1 billion acquisition in 1988 of RJR Nabisco by Kohlberg Kravis Roberts & Co. Close behind: this year's agreement by KKR, Bain Capital LLC and Merrill Lynch & Co.'s private-equity arm to purchase U.S.-based hospital chain HCA Inc. for $21.3 billion.
Just a year ago, the biggest private-equity funds had little more than $5 billion. Blackstone's previous fund, one of the world's largest at the time, was $6.45 billion, raised in 2002. Blackstone declined comment.
Private-equity firms raise money from deep-pocketed investors, including pension funds, university endowments and wealthy families. The firm's managers make money through fees imposed on their clients -- usually about 1.5% of how much they invested -- and on their companies, along with dividends they have those companies pay. Then they get a big cut of the profits when they sell companies, frequently via lucrative new initial public offerings of stock.
The firms used to raise new funds every five years or so, but now that pace has quickened to as often as every two years, keeping a constant flow of new money pouring in as old investments are cashed out. "We are seeing a significant privatization of corporate America," said James Westra, a lawyer with the Boston office of Weil, Gotshal & Manges LLP, who works closely with private-equity firms.
So far this year, about $159 billion has been secured for new buyout funds world-wide, according to Thomson Financial. The firms have spent $421 billion on buying companies this year, up from $253 billion in all of 2005.
Over the past decade, private-equity funds have average investment returns of 17% a year, Thomson Financial data show, though the biggest funds generally do much better.
Blackstone's move likely will ramp up the race for bigger funds. Carlyle Group of Washington, D.C., is targeting a single fund of $15 billion, but may now opt for a larger size. KKR of New York has several initiatives going which will raise a total of as much as $25 billion, though not in a single fund. Texas Pacific Group has a new $15.2 billion fund. Spokesmen for Carlyle, KKR and TPG all declined to comment.
Martin Halusa, chief executive of private-equity firm Apax Partners Worldwide LLP of London, has said that a $100 billion fund is foreseeable.
Founded in 1985, Blackstone now employs 750 people world-wide. In addition to running private-equity funds, it offers investors slices of hedge funds, and operates a group that helps revamp troubled companies.
It decided to reopen its new $15.6 billion fund to investors because it was approaching a limit on how much it can spend each year. The firm promises its clients that it won't invest more than 40% of its money a year to avoid betting too much at once.
Among institutions that have invested in the new fund: Government of Singapore Investment Corp.; CALSTRS, or the California State Teachers' Retirement System; Calpers, or California Public Employees Retirement System; and the Canada Pension Plan.
The new megafunds likely are to intensify criticisms among some investors, especially about the fees that private-equity firms charge. Several investors in Blackstone's previous funds say they are opting out of this one, citing those fees.
Some investors say the fees allow private-equity firms to prosper even if their deals tank, separating investors' interests from the firms'.
"A lot of models are set up just to generate fees," said Joe Landy, co-head of New York private-equity firm Warburg Pincus LLC, at a recent conference. Warburg doesn't charge the companies it controls such fees.
These firms are subject to increasing public scrutiny. Several firms have received preliminary inquiries from the U.S. Department of Justice regarding possible collusion on deals involving multiple funds teaming up. Blackstone hasn't received an inquiry, a person familiar with the matter says.
Private-equity firms used to be disadvantaged in bidding wars for companies, because buyers in the target's industry could wring greater cost efficiencies out of their purchases, so they could afford to bid more. That is what happened last year when private-equity firm Ripplewood Holdings LLC bid for Maytag but was beat out by Whirlpool Corp.
That balance recently has swung in favor of private-equity firms, which in turn will fuel their ability to buy ever-bigger companies. The reason: The debt markets are extending financing to the private-equity firms at a cheaper rate and on more flexible terms, allowing the private-equity firms to offer more. Private-equity firms recently have paid as much as 20% over their acquisition's current share price. |
