Updated with correction
Cheap debt and easy loan terms like those available now typically set the stage for the return of the megaleveraged buyouts, but market participants are divided over what kinds of opportunities are likely to arise.
Even so, some industry insiders say big buyout firms won't be able to resist for long.
Debt is plentiful. When H.J. Heinz Co. sold $3.1 billion in B-grade bonds in March to support the $28 billion leveraged buyout of the ketchup company by Berkshire Hathaway Inc., the company got the same price it could have gotten for bonds of a much higher rating. Another ingredient necessary to finance leveraged buyouts, collateralized loan obligations, made a comeback last year, reaching a volume of $54 billion, a five-year high.
Meanwhile, private equity firms have cash to burn, with an estimated $400 billion in unspent committed capital or “dry powder.”
In the first quarter, private-equity-backed buyout deals also hit a five-year high, at a total value of $87 billion worldwide. This was a whopping 112% increase from the $41 billion in the first quarter of 2012, according to London-based alternative investment research firm Preqin.
“We have the debt conditions for the megabuyout space to pull off very large transactions again,” said Susan Long McAndrews, partner in the San Francisco office of private equity firm Pantheon Ventures, in an interview. “I shouldn't be surprised given debt conditions are so ripe — and now that (the buyouts of) Heinz and Dell have cleared the market, the level of scrutiny by investors ... comes down a little bit for the next one.” (Dell Inc. in February agreed to be taken private by a group led by Silver Lake Partners for $24.4 billion.)
Some of the largest private equity firm executives say that despite the very conducive conditions in the debt and loan markets, they have not been buying all that much. Leon Black, chairman and CEO of Apollo Global Management LLC, New York, said that over the past 15 months his firm has been a net seller and he expects that will continue.
“We've been selling everything that isn't nailed down and if nailed down, we're refinancing at great rates,” said Mr. Black, speaking at the Milken Institute Global Conference in Beverly Hills, Calif., on April 30. “Our view is that the market is pricey for doing traditional buyouts.”
Still, Mr. Black said he is not turning down deals: “When we find opportunities, it's great to have low-cost financing.”