NEW YORK - Buyout king Henry Kravis calls it "the golden age" of private equity, a period where opportunistic Wall Street bankers snagged iconic names like Toys "R" Us, Chrysler and Neiman Marcus in multibillion dollar deals.
Leveraged buyouts are on track to surpass $1 trillion this year, a reflection of private equity's growing influence on the world's business culture. Private equity has helped make very rich men out of dealmakers like Kravis and Blackstone Group's Stephen Schwarzman, who earlier this year threw himself a $3 million birthday bash with Rod Stewart as the entertainment.
There are growing signs that the buyout party might be ending. After nearly two years of record acquisitions, private equity is facing challenges at almost every turn - from lawmakers questioning tax structures to investors reluctant to buy into bloated financing plans.
"For years, private equity has had a walk in the park," said billionaire financier Carl Icahn, a takeover specialist known for his runs at RJR Nabisco and TWA. "It's peaked. But, I don't mean these guys won't make money."
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Icahn, speaking at a conference in New York on Wednesday, said private-equity firms have enjoyed easy access to financing, and struggling companies actively hunted for buyers. Private equity shops acquire companies, ostensibly to turn them around as private entities and then cash in by selling or bringing them public.
State of the industry
At first glance, the industry still seems to be doing well. General Motors Corp. a few days ago agreed to sell its transmission unit to private equity firm Carlyle Group and Canadian investment firm Onex Corp.
But the market has resisted a string of recent debt offerings, in part because fallout from subprime mortgage defaults has caused some investors to chase safer bets.
An estimated $3 billion of debt sales were pulled this week, according to Thomson Financial.
On Friday, Blackstone and Lion Capital LLP were said to be having problems unloading $259 million of loans to acquire soft-drink maker Orangina. Dutch supermarket group Royal Ahold had difficulties on Tuesday selling $650 million of bonds as part of the sale of its U.S. Food Service unit to a group of buyout firms led by Kohlberg Kravis Roberts.
Meanwhile, reluctance about credit and debt spilled into the U.S. junk bond market. Canada's Catalyst Paper abandoned a $200 million high-yield bond offering because of a more skeptical market.
Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein said at an investor conference on Wednesday that the investment bank "remains at a high state of nervousness." The biggest anxiety is that the debt markets will tumble, causing borrowing costs to grow.
"The biggest risk we face is a crisis in the credit markets," he said. "When you think of the wealth created over the past five years in different sectors, much of it was driven or helped by the low level of interest rates and the tightness of credit spreads."
Investor uncertainty about borrowing costs, considering supreme difficulties, has led to tremors on Wall Street. Bear Sterns Cos. has been the most high-profile casualty after it was forced to rescue one of it's hedge funds that lost value because of wrong bets on the mortgage market.
Private-equity firms might be a little worried about their ability to raise money in the equity markets after Blackstone's recent initial public offering. The New York-based firm raised
$4.1 billion after floating its management partnership. Though shares surged 13 percent on its first day of trading, it has since dropped to below the $31 offering price.
The deal was thought to be a blueprint for how others could raise more capital. Investors originally seemed eager to get in on the Blackstone deal, even though they'd have little voting rights and no direct connection to the firm's portfolio of companies and real estate holdings.
Carlyle on Thursday cut the size of a planned IPO of a fund that invests in mortgage-backed bonds because there was lack of interest - trimming the offering by 25 percent to $300 million.
Even if firms like KKR or Carlyle decide to pursue a U.S. listing, there is still the subject of how they would be taxed. Lawmakers are trying to tax buyout firms as companies instead of partnerships - a step that could double the amount they pay the government.
But industry insiders believe - even if Blackstone fell flat - private-equity firms will need to go public to survive long term.
"This is about legacy," she said. "The players are going to have to go public, they are going to need to go public. Blackstone was the turning point."