With $178 billion invested in buyout funds this year, it is no wonder that there are whispers of a buyout bubble.
Nonetheless, these concerns haven't stopped Texas Pacific Group's efforts to raise its fifth fund, which is expected to close shortly at $15 billion, nor Silver Lake Partners' expansion through a merger with mid-market firm Shah Capital and a series of mid-market and large cap funds, which are expected to begin fundraising shortly.
However, earlier in the week buyout veteran Barton Biggs openly aired his concerns about the possibility of a bubble. The former Morgan Stanley banker reportedly railed against the ever-expanding asset class, according to Blogging Stocks. His concern centers around buyout firms taking more risk to invest their larger pools, and therefore investing in bad deals.
His analysis relies on prior experience dating back to the 1980s when a similar glut of capital filled the PE market leading to risky deals. However, since the last bubble, buyout firms have expanded into new industries. For example, Silver Lake invests in technology deals. Of course, one of the most disastrous buyout deals in the 1980s was JH Whitney's leveraged buyout of Prime Computer. At the time, no firm had attempted to acquire a technology company, and the train wreck that ensued after the Prime buyout would leave the sector off limits to buyout firms for almost another decade.
Indeed, Biggs may be right. The writing could be on the wall for buyout firms as the industry finds itself the target of a Department of Justice inquiry. However, the investigation into so-called club deals may be the factor that prevents the industry from playing out Bigg's prediction as it could curtail risky dealmaking to prevent additional litigation. —Matthew Wurtzel
See story about Biggs from Blogging Stocks
See story about TPG from LBO Wire
See story about Silver Lake from PE Hub
See club deal Dealwatch
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