Private equity hitting warp speed: buoyed by a flood of investments seeking higher returns, private equity firms are busily doing buyouts and even joining forces for huge deals. And, there appears to be no let-up in the mega-deals trend this year.

• Author: Sweeney, Paul
• Position: SPECIAL REPORT: CAPTIAL MARKETS

These are heady days for the private equity industry, which has seen a cataract of capital gushing into the marketplace. According to the Private Equity Analyst, a Dow Jones publication, a record $215.4 billion poured into private equity in 2006. Of that, $148.8 billion went toward buyout funds, 33 percent greater than 2005, the previous record year.

The result of all that money--mostly raised from pension funds, endowments and other institutions looking for ways to beat the equities markets--is that outsized takeovers of huge public companies are shattering all previous records for deal size.

To engineer eye-popping deals, firms are joining forces in "clubbing" arrangements that pool billions of dollars. A case in point: the $21.2 billion in equity alone ponied up for the buyout of health services company HCA last July by Kohlberg Kravis Roberts, Bain Capital and Merrill Lynch Global Private Equity, all of which teamed up as equity partners.

At the same time, deal-making is raging in all segments of the market. Whole divisions of huge conglomerates--such as Hertz, a division of Ford Motor Co.--are being hived off, loaded up with debt and operated more profitably by private equity shops in preparation for either an initial public offering or a resale. And independent and family-run businesses in the middle-market are either selling out completely to private equity firms or partnering up with them.

Increasingly, private equity firms are combining or "rolling up" niche companies, such as regional food, packaging or printing businesses, to create national conglomerates. The phenomenon is helping jack up prices across the board, industry sources say, making for a seller's market.

Prices are now at 10-12 times cash flow, which is usually calculated as "earnings before interest, taxes, depreciation and amortization," or EBITDA, according to an October study by the Association for Corporate Growth (ACG), the private equity industry's trade association, and Grant Thornton.

Eric Malchow, managing director at Lincoln International, a Chicago-based boutique bank that specializes in brokering sales of middle-market companies to private equity firms, says that as recently as 2003, companies were being sold at roughly six times cash flow. "It's the perfect sunny day," Malchow says of the current environment. "We don't see any slowdown in the marketplace coming in 2007."

Malchow has lots of company. A recent survey by ACG and Thomson Financial discloses an industry in a state of near-euphoria. The survey found that a supermajority of global players--85 percent of 1,200 investment bankers, private equity fund managers, lawyers, accountants, consultants and other professionals from 45 states and 25 countries--expects 2007 to equal or surpass last year's record $3.8 trillion in global mergers and acquisitions. A scant 12 percent in the survey expect a slowdown.

(Compare that to the...