What does the buyout boom mean?

• Author: Marshall, Jeffrey
• Position: SPECIAL REPORT - Boost in private equity funds

When Prince sings about partying "like it's 1999," private equity players can relate: They've have been busy bringing out the party favors. But this time, it's not just venture capitalists in Silicon Valley erecting the dot-com industry, like it was back then. It's about private equity shops buying big companies--sometimes huge companies--and taking them private.

The preceding story effectively shows how and why that has happened, what private equity players are doing and how big the phenomenon has become. But the implications of the private equity surge are harder to sort out. What does it mean for the capital markets, and for the stock exchanges? And how long could it last?

Those aren't easy questions to answer, and predicting the future is a fool's game. But market participants, consultants and others interviewed agree that if current trends hold up, there is no reason to expect a slowdown any time in the near future. New records are waiting to be set, even as nine of the world's 10 largest leveraged takeovers have been done in the past 18 months; the only exception was the RJR Nabisco leveraged buyout in 1989.

Carol Levenson, research director at Gimme Credit, a New York firm, argues that the way things are going, being a huge public company will offer little or no protection from bulked-up private equity firms that would be able to bid on almost anything.

The surge in private equity makes the vehicles that investors put their money into appear a lot like unregulated mutual funds, says Mark Sunshine, CFO and chief operating officer of First Capital in West Palm Beach, Fla., a firm engaged in factoring, asset-based lending and accounts receivable for middle-market companies. While the popular press focus during the dot-com initial public offering (IPO) boom was on the extraordinary gains and losses by individual investors, the vast majority of the real investment action was in institutional money that bought speculative equity investments in small public companies, he says.

"The current private equity wave is the reincarnation of that without regulation--more than anything, it's a way to avoid compliance with [the] Sarbanes-Oxley [Act]," he says.

"A lot of this is cyclical, but there is also a reactive piece--there are people who were afraid to go public or stay public," says Cynthia Jamison, managing partner for the Chicago office of Tatum LLC, the country's largest executive services firm. "The idea of private money in the short term seemed easier, but that is moderating. When Sarbanes-Oxley first hit, there was a thought that they would go to other exchanges abroad" where regulation wasn't as strict.

Indeed, concerns have been building about the competitive posture of U.S. capital markets; once the envy of the world, they have been losing ground as international exchanges pick up listings and U.S. companies that go private de-list. Studies and reports in recent months have raised a series of issues, with much of the focus on the ostensibly high cost of regulation in the U.S. And, that has prompted deeper concerns.

"The U.S. has enjoyed financial supremacy in last few decades, with the dollar effectively becoming the reserve and exchange currency for the world," Sunshine says. "I fear that if the United States loses its preeminence as the financial market of choice for publicly traded companies, there are very...