| NEW YORK
NEW YORK Private equity deal volume sank to a five-year low in 2008, one of the industry's roughest years ever, and 2009 is unlikely to get any easier as firms struggle to find deals, keep portfolio companies above water, and pacify increasingly restless investors.
Global private equity activity sank to $188.7 billion this year, down 72 percent from 2007, Thomson Reuters data show, as the global financial crisis crippled banks' ability to lend for deals.
Buyout deals were just 7 percent of total M&A volume -- the lowest level since 2001 and a far cry from the boom years of 2005-2007 when giants such as Kohlberg Kravis Roberts & Co KKR.UL, Carlyle Group CYL.UL and Blackstone Group (BX.N) were striking multibillion-dollar deals on a regular basis.
Buyout deals reached an all-time high of 20.5 percent of M&A volume in 2006.
As the economic malaise spreads, some of the deals agreed during the heady credit-fueled period look like increasingly bad ideas as companies are now saddled with high debt repayments at the worst time.
Indeed, the last 12 months have been punctuated by buyout firms trying to extract themselves from ill-conceived deals.
The biggest issue for the year ahead is retaining support from buyout firms' limited partners -- the powerful pension and endowment funds that are their main investors. Return on funds spent during the boom could be hammered by portfolio company failures and deal blow-ups.
"The question is, how many limited partners will continue providing money?" said Steven Kaplan, a professor of finance specializing in private equity at the University of Chicago. "Historically, in markets like this they cut back, and it's precisely the time they shouldn't."
Meanwhile, public appetite for investment in private equity has slumped. Shares of Blackstone are trading at around a fifth of their June 2007 initial public offering price of $31. That doesn't bode well for others aiming at the public market, such as KKR and Apollo Management.
"The demand for leveraged loans has been dramatically reduced and therefore the potential deal size has been dramatically reduced," said James Stynes, global chairman of mergers and acquisitions at Deutsche Bank Securities.
"I don't see double-digit, billion-dollar deals coming back for quite a long while. We're much more likely to see the 2 to 5 billion dollar deals once markets fully open up".
Among the biggest buyouts clinched this year were the $3.5 billion acquisition of the Weather Channel by Bain Capital and Blackstone, and Carlyle's $2.5 billion takeover of consulting firm Booz Allen Hamilton Inc.
In terms of deal volume, the Americas held its dominance over Europe by a hair, accounting for 42.4 percent of buyouts, as opposed to 42 percent in Europe.
The finance industry accounted for 25 percent of U.S. private equity investments for the year, perhaps in a sign that funds saw opportunities to buy beaten-down companies.
This was not always successful, though. David Bonderman's TPG Inc TPG.UL invested $1.35 billion in Washington Mutual WAMUQ.PK just months before WaMu was seized by the government and its assets sold to JPMorgan Chase & Co (JPM.N).
Globally, energy and power deals were the most prolific, accounting for 17 percent of private equity transactions.
But the list of deals that cratered, descended into catfights and litigation, or just plain blew up, is long.
On top of TPG's WaMu fiasco, Apollo spent months extracting itself from a $6.5 billion buyout of Huntsman Corp (HUN.N). And the C$34.8 billion takeover of Canadian telecoms firm BCE Inc (BCE.TO)(BCE.N) collapsed.
The highly leveraged Tribune Co declared bankruptcy just a year after Sam Zell completed his leveraged buyout of the media company, while Cerberus' Chrysler is struggling for survival.
"There will inevitably be more distress, there will be companies that frankly will fail," said David Currie, chief executive of Standard Life Capital Partners, the private equity wing of insurer Standard Life. "What we are looking out for through our portfolio is where that is and looking to the managers to contain it."
The revival of the credit markets is vital. Until then, private equity will rely on smaller deals, buying minority stakes, known as PIPES, or investing larger amounts of equity in deals.
"I think we will see reduced private equity activity in 2009, other than transactions such as PIPEs that don't require so much leverage," said Douglas Warner, a senior member of Weil, Gotshal & Manges LLP's private equity practice. "I don't think the debt markets will come back immediately."
Limited partners, as they reduce allocations to riskier asset classes, are increasingly unwilling to commit funds to private equity houses they have previously backed.
Four out of five U.S. investors and nearly two-thirds of investors in the UK would refuse to re-invest if they felt funds had underperformed, diverged from their core focus, or lost some key members of staff, according to a recent report from secondary private equity asset specialist Coller Capital.
Sale of exposure to private equity funds has risen in the so-called secondary market as the years of high returns end. Universities such as Harvard are among those trying to sell private equity assets, sources have told Reuters.
David de Weese, partner at secondary market specialist Paul Capital, estimates that $130 billion to $140 billion of private equity will available for sale by institutional investors globally during the next two years, and that supply will continue to significantly outstrip demand in 2009.
But improvement may lie down the road, with funds invested during the coming year expected to do better.
"I think the 2009 vintage is going to be like a fine wine vintage -- it's going to be a very small harvest but it will be very high quality," said Axel Holtrup, director of Silver Lake.
(Additional reporting by Jui Chakravorty Das in New York and Simon Meads in London; editing by John Wallace)