bloggingbuyouts

In one of the least convincing editorials in recent memory -- no small accomplishment -- Service Employees International Union international president Andy Stern argues that "short-term capital infusions from private-equity funds will only make the banking crisis worse, by encouraging risky behavior and abusive banking practices."

He's so wrong. Risky behavior is encouraged by compensation systems that reward returns regardless of risk, supine directors lacking true independence, and an ownership structure so diffuse that there is no one to enforce accountability.

A private equity fund with a large equity stake and no ulterior motives -- they make money from increased shareholder value, not fees and bonuses -- which paid cash for their shares is the best thing for shareholders. The one valid point that Stern makes is this: "It's hard to imagine private-equity funds resisting the urge to double down on the tactics banks have used to drive profits in recent years – unfair lending practices, higher fees, and exorbitant interest rates on credit cards and other consumer products."

That's probably true -- private equity funds may push public companies to improve their profitability, but that's their job. Consumer protection is the domain of regulators, and publicly-traded banks have a responsibility to increase their profits as much as possible within the confines of the law.

We shouldn't blame private equity for lax regulation.

Bloomberg News featured an interesting piece entitled Wall Street bankers wonder how big leveraged buyouts can get. With the value of leveraged buyouts in the first quarter of 2007 up a staggering 40% year over year, private equity mania doesn't appear to be slowing down yet, although The Carlyle Group may be going conservative.

But in addition the reality of a large increase in the overall size of the industry, there are also questions about how big individual deals can get. Earlier this year, we began to hear rumors that Home Depot (NYSE:HD)could become a buyout candidate, a deal that just a few years ago would have been considered to large to even consider. Consider this line from the Bloomberg piece:

"What was deemed to be possible a year ago, when we thought the limits were $25 billion to $30 billion, has been easily beaten, particularly in the U.S.," said Gavin MacDonald, the London-based head of European mergers and acquisitions at Morgan Stanley. A $100 billion deal "isn't outside the realms of possibility," he said.

There may be a compelling reason for firms like Carlyle, Blackstone, and KKR to look at 100 billion dollar deals. With the private equity industry exploding, there is a lot of competition for smaller deals, and that competition is making attractive buyout candidates harder to find. But with only a handful of players with war chests big enough to even dream about acquiring a Home Depot or an Anheuser Busch, (NYSE:BUD) they may be able to find better deals there. Flying in an airplane may seem dangerous because it's fast and unfamiliar, it's actually safer than driving because there's no traffic. That may apply to leveraged buyouts as well.