Global buyout firms warn of tightening credit markets

Kravis, who will be speaking at the AVCJ Forum in Hong Kong in November, said that the cost of capital for KKR's buyout of Pfizer's Capsugel unit in April was 6.88%, but if the same deal were done today it would cost "just under 9%," Bloomberg reported.

With buyers having to put up more cash as banks become more reluctant to lend funds, it hits the profit margins private equity firms are able to reap through IPOs or trade sales. Private equity transactions are up 51% year-on-year at $287 billion so far in 2011, according to Bloomberg data. However, dealmaking activity dropped to $8.2 billion in September from $29 billion in August due to economic uncertainty and volatile debt and equity markets.

Christopher Flowers, founder of JC Flowers & Co., said the economic problems in Europe are very troubling, adding that is keeping "plenty of cash and capital" in the event of a deeper crisis. He painted an equally bleak picture of the credit markets, saying that interbank lending in the region is dead.

Guy Hands, chairman and chief investment officer at Terra Firma Capital Partners, suggested that private equity players may bring down their leverage levels on deals, which would in turn bring down target returns from 25-30% to around 20%. Buyout firms typically seek financing to cover more than half the purchase price and use their own funds to cover the rest.

It is unclear what the current situation means for fundraising. Prequin estimates that global fundraising could reach $300 billion in 2011, with 341 vehicles having secured $160.7 billion as of mid-August. A total of 1,721 funds are believed to be in the process of fundraising, with a collective target of $692 billion.

Notably, a host of leading US and European buyout firms are expected to launch their latest round of mega-funds in the second half of 2011 - the first time many have tapped the market for large sums of money since before the global financial crisis. The Carlyle Group, Bain Capital, KKR, Warburg Pincus, Vestar Capital, Thomas H. Lee Partners, Apax Partners, Permira, EQT Partners and BC Partners are among those tipped to seek investment alongside a host of leading venture capital players.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North America
• Financing
• Fundraising
• Buyout
• KKR
• J.C. Flowers & Co.
• USA
• buyout
• Fundraising
• Leveraged finance