private equity

A $100bn LBO no longer seems unthinkable. Home Depot, which is rumored to be a target, has an enterprise value of about $90 billion. Add a premium, and you are close to that number. If a deal goes through, it is feasible that private equity groups could find, say $25 bn equity, and raise a further $75 bn in today’s extraordinarily generous markets.

But what about the exit?? A trade sale is virtually impossible for any $100 bn+ company (there are only 60 non-financial public companies worldwide with that size). Financial engineering has its limits (given the risk of tougher market conditions). And, an initial public offering for a 15-20 per cent float will be extremely difficult (Bank of China aside, the biggest IPOs ever - Enel, Deutsche Telekom, AT&T Wireless - raised between $10bn and $15bn). Even with a successful IPO, a complete, staged exit from the remaining stake could take very long.

With ever-increasing amount of capital chasing bigger and bigger deals that seems to reach a plateau, expect returns on private equity investments to go down.