Some of the world's biggest private equity investors raised concerns this w...
BERLIN - Some of the world’s biggest private equity investors raised concerns this week that the $3.4 trillion leveraged buyout industry is overheating, as more fund managers pay top dollar for acquisitions that could prove costly down the line.
The average leveraged buyout worldwide cost around 11 times a company’s 12-month earnings before interest, taxes, depreciation and amortization in 2018, up from 8.6 times in 2009, according to consultancy Bain & Co. At the industry’s annual get-together at the SuperReturn conference in Berlin, several prominent investors asked whether fund managers were buying at a peak, as happened in the years that preceded the 2008 financial crisis.
Private equity fund managers earn lucrative fees on investor capital, typically a 1.5 percent management fee on the money committed and a 20 percent cut of the profits as a performance fee, subject usually to a returns threshold. As a result, they are under pressure to deploy that capital, even if the deals available are expensive.
In a typical leveraged buyout, private equity firms juice up returns by loading up acquisitions with debt, which is often provided by banks. But in sectors such as technology, valuations are becoming so lofty that banks will no longer finance the majority of some deals. Without such financial engineering, the buyout firms are betting on the acquired companies’ projected high rates of growth to drive returns.
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