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Carey, The Deal's private equity maven, looks at the profoundly mixed bag most buyout shops are confronting: lots of investor capital (some $470 billion) but still-difficult markets, floundering portfolio companies and the looming shadow of maturing debt from the megadeals of the boom era. The numbers are hair-raising: Some $430 billion in debt will mature between 2012 and 2014. Carey runs through the various options, on both the investing and the financing sides of the business, and comes to the conclusion that a lot of PE shops will fail before they get past that daunting hurdle. Carey quotes one buyout maven: " 'There will be a lot of RJRs,' he says, alluding to KKR's $31.3 billion buyout of RJR Nabisco in 1989, which held the size record for an LBO for 16 years and which lost money for Kohlberg Kravis & Roberts. 'Not bad companies necessarily, but companies with capital structures the sponsors can't extricate themselves from and that can't be refinanced.' This investor says he expects one-quarter of the megadeals to be total busts, another quarter to make a profit and half to post a partial loss. 'But that's only if the economy recovers,' he adds. 'If it doesn't, those deals are all toast.' " In his companion piece, Monga looks more deeply into that $430 billion. He makes several points: Most of the debt came from the largest deals between 2005 and 2007, and most of it involves the largest private equity shops, from Apollo Management to TPG Capital to KKR. The allure of these megadeals, one of Monga's sources says, brought about a subtle change, from investing in industry sectors to investing in capital markets. Writes Monga: "This strategy was predicated on faith that loans could be continually refinanced, that exit options in the form of the equity markets or mergers and acquisitions fueled by more financing would be easily available and lead to profits that justified the outsized risk the sponsors were taking. There was also the belief that an ever-expanding economy would allow companies to keep increasing their Ebitda and pay down debt. The strategy had more than a few similarities with the one used by people who borrowed in increasing amounts to finance home purchases and hoped for either a quick flip or continually rising prices that would make debt more manageable." See Carey's story from The Deal magazine Robert Teitelman is the editor in chief of The Deal.
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David Carey and Vipal Monga take a hard look at the prospects for private equity in the new issue of 
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