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A Private-Equity Rebirth Is Premature


The buyout industry forecasts a big return. Don't listen to it.

Private equity is back!

Or so it would seem, according to some of the biggest rock stars from the leveraged buyout industry this week. The Blackstone Group's (BX) Steve Schwarzman told a Dubai conference that the worst is behind the industry. "The future now looks substantially brighter for us in the private-equity business," he said, according to Bloomberg. He added that it will be several more years before private equity returns to "what most people regard as a normal situation."

But what exactly is a "normal situation"? The massively leveraged buyout deals made at ridiculous premiums we saw at the private-equity peak in 2006 and 2007? The same deals that David Rubenstein, co-founder of the Carlyle Group, admitted yesterday had helped fuel the financial bubble that later burst into the credit crisis?

Rubenstein agrees that happy days are here again for private equity, but he believes the industry will reemerge in some other form than the loose leverage deals that defined it in the past. It will be driven by smaller investments with greater equity components and less debt. He also thinks it needs a new name, something like "change capital or value-added equity."

Those names don't quite roll off the tongue, but the industry is certainly in need of a new image. Particularly if it plans to become bigger than it was before the bubble burst, as Rubenstein predicts it will.

A buyout industry bigger than it was in 2006 and 2007? This sounds both troubling and preposterous at the same time.

It's difficult to believe it's even possible for the industry to return to those levels, particularly if debt will play a smaller role in deals (and let's hope it does). In 2006, buyout firms raised $210 billion and made acquisitions worth $701 billion, according to Bloomberg. Between 2006 and 2007 it financed $1.4 trillion worth of buyouts.
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