Private equity: wing and a prayer

Executive jets were once a sign companies were run for the benefit of bosses, alerting corporate raiders to takeover opportunities. How are fresh buyout fortunes to be made, now that dealmakers are more likely to travel in Learjets than are chief executives?

The question matters because private equity is making a comeback. Established firms have raised record funds and the next generation of buyout specialists are spinning out to start new ones. The industry will surpass the $369bn record fundraising of 2007, forecasts data provider Preqin.

Big deals are in prospect again. Cinven and Bain Capital last month agreed the largest leveraged buyout of a European-listed company in four years, paying €4.1bn for Stada, the German generic drugmaker. A group of private equity firms were reported this year as ready to pay SKr200bn ($22bn) for the hygiene arm of SCA, a forestry group.

Yet a decade after the last peak in dealmaking, public companies have internalised the tactics of private equity. Cost-cutting is the defining task for most chiefs in an era of modest economic growth. Activists investors prowl in search of flab.

High-yield bond markets happily fund public dealmakers such as Patrick Drahi, the French billionaire behind telecoms group Altice. Even for less aggressive managers, funding payouts to shareholders with debt has become unremarkable.

The weight of money makes it inevitable buyouts will still come: $942bn of so-called dry powder, according to Preqin. Very low interest rates mean the cost of debt has plummeted.

Competition will push up prices. Nets, the Scandinavian payments processor, is close to a deal to value its shares at more than DKr31.3bn ($5bn), almost twice what was paid the last time it was bought by a private equity consortium, in 2014.

Pension funds and endowments handing over billions of dollars in fees pay for the industry’s record, a roster of deals long closed. They might wonder if the next spree will match the past. Bargains cannot so easily be spotted from 41,000 feet.

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