Buyout deals plummet as leverage seen elusive

By Megan Davies and Olesya Dmitracova

NEW YORK/LONDON (Reuters) - Private equity firms surveying the wreckage of America's financial system have a crucial question -- when will credit return?

The worsening financial crisis has hampered large buyouts for well over a year. For the year-to-date, global buyout activity plummeted 74 percent from a year ago to a four-year low of $180 billion, Thomson Reuters data showed.

"It is going to be eerie for a while," Goldman Sachs global head of merchant banking, Richard Friedman, said at a private equity conference recently. "Risk will become a four-letter word at this point. Everyone's going to be more cautious."

Multibillion-dollar buyouts like those seen in the past few years will not happen anytime soon. In the private equity boom that peaked in 2007, deals struck included the $32 billion takeover of power company TXU Corp by Kohlberg Kravis Roberts & Co KKR.UL and TPG Capital LP TPG.UL, and the $17.9 billion takeover of Clear Channel Communications led by Thomas H. Lee Partners THL.UL and Bain Capital.

Buyout giant Blackstone Group LP's (BX.N) chief operating officer Tony James said early in September that the limit on bank financing for leveraged buyouts was about $5 billion.

Even that seems optimistic after the most recent events on Wall Street. One buyout executive who declined to be named said $2 billion was currently the limit for financing a deal, as under-pressure banks are unwilling to lend precious capital.

Bankers and private equity executives say that striking a deal now takes a longer time. Buyout firms are scared the worse is yet to come and they may overpay, while bankers say sellers have overly-rosy expectations about how much they are worth.

While leveraged buyout deals have been done in recent months, they have typically been smaller in size and financing has been more creative than just bank debt.

GSO, Blackstone's hedge fund that specializes in leveraged debt, partially funded the $3.5 billion takeover of U.S. cable television firm The Weather Channel by a consortium that included Blackstone.

"Buyout volume and credit availability are not necessarily related in a linear way," said Stephen Moseley, president of private equity advisory business StepStone Group LLC. "We'd expect to see private equity investments in any environment but its harder to achieve a big public-to-private deal now and an LBO is a different beast. But private equity hasn't gone away just because the credit markets tightened up -- it just changed shape."

The fall in deal volume was the most acute in the United States, with an 83.5 percent fall year-to-date to $61.8 billion. Volume in Europe fell 61 percent to $70.7 billion and in Asia fell 25 percent to $18.8 billion. The rest of the world totaled $29.8 billion.

But with billions to invest, private equity firms can't sit on the sidelines forever. They must invest capital or give it back to investors known as "limited partners" who put money in their funds.

Private equity firms "have access to huge amounts of money," said David Stark, a director in reorganization services at Deloitte DLTE.UL. "They haven't been able to invest. A lot of them are sitting on the sidelines."

OTHER OPPORTUNITIES

Meanwhile, private equity firms have been looking further afield than typical leveraged buyouts.