What the hell’s going on? The outbreak of private equity deals has triggered a flood of cyber-bar-side analysis. Here’s Abnormal Returns’ take.
Look to the Five C’s: capital, credit, complexity, control, Congress.
What we are watching could simply be a case of private equity firms feeling the need to put their vast war-chests to work. But while there may be an abundance of private equity capital, it is the availability of high yield financing that makes leveraged transactions viable.
Meanwhile, the buyout boom has led to a self-reinforcing cycle of high yield debt issuance, credit derivatives and shockingly tight spreads — a complex and potentially hazardous market brew.
Then there’s is the issue of chief executive control. While in a perfect world there should be no difference running a large corporation in the public or private spheres, right now the playing field is notably tilted towards private ownership.
But all this might not last for long — and Abnormal Returns wonders whether the change of control in the US Congress might be forcing the hand of some dealmakers. Sure, Congress has limited deal-blocking powers, but could it be that the instinctive anti-trust faction at the Justice Department sense a new wind blowing?
In any case, at some point this buyout trend just has to dissipate. So bring on the LIPO — the leveraged IPO. Private equity will need an exit and the public markets are there to provide it.