Letter from New York Part II

Those who have read Jim’s note of this morning will be aware that he and I spent the latter part of last week in New York. Whilst the US economy dominated many a meeting and conversation another prevalent theme and concern was the leveraged buyout or LBO. Those familiar with our views will be well aware this is something that has concerned us as a team for sometime now.
Flush with a record $172 billion in new funds this year, buyout firms have tripled the pace of their takeovers, announcing a record $616 billion of deals (the initial equity investment can be levered through borrowing many times).That compares with $265.5 billion in 2005, according to data compiled by Bloomberg. The obvious outcome is ever increasing multiples, leverage and potential downside for bond investors.

The consensus I took away from our trip was that 2007 is likely to see new records set. Whether we will see an LBO the size of Home Depot (see Richard’s note 4th December) is uncertain but far from impossible. In fact it is merely the perceived likelihood of ever more aggressive LBO’s that puts pressure on credit spreads.

Johannes Huth of private equity giant KKR’s summed it up nicely for me. “One way to respond to rising competition is by focusing on increasingly larger transactions, where only a handful of private equity firms can effectively compete.”

On a different note those in the Big Apple who fancy a challenge should head to Keens Steakhouse at 72 West 36th St…. you wont be disappointed!

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Stefan Isaacs

Job Title: Deputy CIO Public Fixed Income

Specialist Subjects: Bonds

Likes: Football, travel and the prospect of retirement

Heroes: Sir David Attenborough, Bill Shankly and Theodor Herzl

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