LEADING financiers yesterday called the top of the private equity market after buyout firms balked at the prices and walked away from the fourth US auction in ten days.
Tom Lamb, managing director of Barclays Private Equity, said that even though private equity groups had amassed tens of billions of dollars in buyout funds, prices had spiralled out of control. “There has to be a point at which you just can’t pay any more, otherwise the returns will be so low that you will struggle to raise future investment funds,” he said. “I think we’re at that point now and as a result many buyout firms could struggle to spend the funds they have amassed.”
Mr Lamb has expressed caution before about over-leveraged buy-outs and overheating in the private equity sector, but his comments yesterday came as the $3.8 billion (£2 billion) asking price for Jones Apparel, the American owner of the Nine West shoe retailer and Barneys New York, the upmarket department store, was judged too steep by buyout firms such as Bain Capital and Texas Pacific.
Mr Lamb told The Times: “As money has poured into private equity, people have been saying: ‘I know a company’s worth $80 a share, but under the circumstances we’re prepared to pay $90.’ But often somebody else has come in and paid $110.”
Mr Lamb said that in many cases it was the banks that would put the brakes on deals as they become wary of lending higher and higher percentages of the leveraged buyouts’ transaction value at the same time as prices spiral.
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Pete Peterson, co-founder of Blackstone Group, which last month raised $15.6 billion for the world’s largest buyout fund, recently said: “The rush into private equity is another example of a lot more money chasing fewer goods. That phenomenon tends to raise prices and reduce returns. There is no question that there are some long-term headwinds in the economy — such as the unsustainable entitlement programmes, current account deficits, healthcare and energy costs.”
Mr Peterson, the 81-year-old former chairman of Lehman Brothers who was US Secretary of Commerce under President Nixon, added: “In this environment, the successful private equity firms will be required to concentrate much more on improving the operating performance of their portfolio companies than relying on financial engineering and market valuations.”
Other leading figures in the private equity industry, such as Jon Moulton and Sir Ronald Cohen, who founded Alchemy Partners and Apax respectively, have also given warning that buyout firms have been loading too much debt into their deals.
Kohlberg Kravis Roberts and Carlyle Group’s recent joint $11.6 billion takeover of VNU, the Dutch media company, secured its financing only after the deal was restructured.
Jones Apparel took itself off the market days after Imax, the big-screen cinema group, called off its sale after a five-month auction in which it failed to find a buyer at the right price.
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ImClone Systems, the biotechnology company in which Martha Stewart made her infamous share deal, and Bally Total Fitness, a US health club chain, pulled their auctions last week, again because they could not attract a high enough price.