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Bloomberg News: Buyout firm record-setter sees bigger deals ahead

Equity firms seen making bigger deals
 
By Edward Evans
Published: February 28, 2007
 
FRANKFURT: A day after he helped set a $45 billion record for the biggest buyout in the world, David Bonderman, co-founder of Texas Pacific Group, said Tuesday that he expected buyout firms to maintain their acquisition spree.

Speaking at a conference here, Bonderman said, “2006 was a record year, and I predict we’ll have another record year in 2007.” He added, “I see no reason why private equity won’t be a substantial part of the capital markets — a much more substantial part than it is today.”

With low-cost debt, Bonderman said, buyout firms would single out publicly traded U.S. companies as their stock market valuations languished and executives sought to avoid the disclosure rules created by the Sarbanes- Oxley Act. Buyout firms will continue their record deal-making until the debt available dried up, he added.

Texas Pacific and a partner, Kohlberg Kravis Roberts, agreed Monday to buy the Texas power producer TXU for $45 billion in cash and debt in the biggest leveraged buyout ever. Texas Pacific, like other buyout firms, is under increasing pressure from investors to complete larger deals after it amassed a record $15 billion fund last year.

Closely held buyout firms like KKR and Texas Pacific finance their deals using cash from investors, their own funds and debt secured by the companies they are buying. They typically seek to expand companies or to improve their performance before selling them, usually within five years.

Lenders are relaxing the rules they require borrowers to follow, Bonderman said. In July, Texas Pacific and Leonard Green & Partners bought Petco Animal Supplies for a second time. This time, the lenders did not set leverage limits or specify how much cash they would require Petco to set aside to cover interest payments.

Bonderman played down growing political scrutiny of the industry, saying private equity firms’ activities amount to just a “rounding error” in the global capital markets.

The industry has less purchasing power than the combined market value of Siemens, Microsoft, Toyota Motor and Royal Dutch Shell, he said.

What has drawn attention, he added, is the number of public companies taken private. “There’s plenty more room for this phenomenon to continue and plenty more room for anxiety for those who feel anxious about private equity transactions,” he said.

Blackstone takes on KKR

Stephen Schwarzman, co-founder of Blackstone Group, said Tuesday that his rival, Henry Kravis, had destroyed demand for initial public offerings of private equity funds.

In May, KKR raised $5 billion — triple the amount it originally sought — for its first publicly traded leveraged buyout fund. The shares have since dropped by as much as 16 percent and have never traded above their IPO price. That performance prompted the buyout firm Doughty Hanson to drop plans for a €1 billion, or $1.32 billion, fund IPO.

“KKR did a great job with their vehicle,” Schwarzman said during a panel discussion at the Frankfurt conference. “They destroyed the market for everyone else, which was their objective.”

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