Feb
13

IMF warns of private equity boom risks

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In the past, I have done a poston regulators like Britain's Financial Services Authority keeping a nervous eye on the buyout boom and I have looked at questionswhether private equity will be brought to heel with its own version of Sarbanes-Oxley.

Now the International Monetary Fund has warned that the boom is creating dangers and risks. And it warns that some private equity deals will fail to deliver.

In its latest Global Financial Stability Report, the IMF says the enoromous appetite for overly-leveraged buyouts is driving up prices and will leave acquired companies saddled with debt.

"With allocations to private equity funds continuing to rise, it appears likely that in the future, more funds will be chasing fewer attractive deals. Already, rating agencies have warned that the number of viable targets has diminished. The strong demand for all elements of the capital structure of these deals means that prices are often bid up to levels that represent high multiples of earnings."

The IMF acknowledges that the boom is happening in a climate of global growth, low real interest rates, big profits and low volatility. But it warns that it would not take much to drive things off the rails.

"If one of these factors changes, deals that looked promising in a benign environment could suddenly appear much less attractive. It is therefore likely that some private equity deals will fail to live up to expectations. The risk from a financial stability viewpoint is that the collapse of several large and high-profile deals during the syndication stage would trigger a wider re-appraisal across a broader range of products.''

12 Apr 2007