Private Equity's Retrenchment

The Washington Post has a good piece up on the continuing retrenchment affecting private equity players. The subprime fallout stopped the private equity tsunami in its tracks midway through 2007 and things don't seem any closer to opening up now. Pros in the story say that the days of the massive buyouts are over for now. But we may see smaller deals that aren't as hard to finance--up to $2 billion or $3 billion--continue to take place.

"The next 18 months should be the best in a long time for small, nimble firms that only need to borrow at their historical levels to complete deals," said Halifax founder David Dupree.

If the U.S. buyout market looks exhausted, the big private-equity firms will continue to expand their buyout presence in such places as China, India, Brazil, the Middle East and South Africa, where some economies are growing faster than here.

Look for private equity to increase its presence in other, non-traditional lines of business such as venture capital, real estate and distressed debt. Private equity may look to buy some of the $100 billion or so in distressed debt, at a discount, that banks are holding on their balance sheets. Some of that debt is from private equity's own buyout deals in 2007.

The disruption in the financial markets will make it likely that private equity may begin trolling for investments in devalued banks and lenders, similar to the $30 billion or so in investments that Middle East and Asian governments have made in the past couple of months in ailing financial firms like Merrill Lynch, Citigroup and Bear Stearns. Carlyle already has a new team exploring that area.

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