Private Equity Investment Surges in 2006

Though many of this year's big business deals were corporate mergers, Google acquiring YouTube for example, some of the flashiest deals involved private equity firms. These firms, composed of money collected from wealthy individuals and institutions, were used this year to buy up all kinds of companies.

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RENEE MONTAGNE, host:

The business news starts today with corporate mergers.

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MONTAGNE: There were some notable corporate mergers this year - AT&T and BellSouth, Google and YouTube, to name just a few. Some of the flashiest deals involved what are called private equity funds. These are pools of money collected from institutional investors and wealthy people and then used to buy up companies of all kinds.

These companies often get saddled with huge amounts of debt in the process, though that seems not to have deterred investors. NPR's Jim Zarroli reports.

JIM ZARROLI: If you want to understand what Monomoy Capital Partners is, take a look around the walls of the conference rooms in the firm's office on West 57th Street in Manhattan. There are pictures of some of the products made by companies that Monomoy owns. Giant trucks, oil-drilling platforms, huge spools of wire rope thick enough to hold up suspension bridges.

There are also scattered around the office lots and lots of baked goods.

Mr. STEVE PRESSER (Partner, Monomoy Capital Partners): The bakery that we happen to own has been sending us some baked goods as gifts over the holidays.

ZARROLI: Steve Presser is a partner at the firm.

Mr. PRESSER: The problem is it's not a bakery like you and I think of a bakery, it's a big manufacturing complex. So when they send us a brownie, they send us a whole pallet full of brownies.

ZARROLI: How big is a pallet?

Mr. PRESSER: About six feet wide in this case, by six-feet deep and six-feet tall, all brownies.

ZARROLI: Monomoy is a private equity fund, which means it takes money from investors and uses it to buy promising companies. Monomoy doesn't actually run the companies it buys and it doesn't really care too much what businesses they're in. It usually just holds onto them for a few years and then tries to sell them at a big profit.

Bob Kaiser, an analyst at Thomson Financial, says private equity funds like Monomoy now account for about 27 percent of all mergers and acquisitions, two to three times their historic average.

Mr. BOB KAISER (Analyst, Thomson Financial): What's going on today is really unprecedented, the extent, the magnitude that private equity is participating in U.S. M&A.

ZARROLI: Kaiser says private equity funds took in about $133 billion in 2005, much of it coming from big pension funds and endowments. So much money flowed into private equity that some of the biggest funds now exceed $3 billion in assets. And this year many of those funds went on a shopping spree.

Of the ten biggest private equity deals ever struck, eight took place this year. In November, the Blackstone Group bought Equity Office Properties Trust, a big commercial office building company, for $32 billion. Clear Channel Communications, the hospital company HCA, the casino owner Harrah's, and Albertson's supermarket chain were all acquired by private equity funds.

Steve Presser says there is so much private equity money out there right now that it's getting harder for firms like his to find companies to buy.

Mr. PRESSER: We see more and more funds out there, private equity funds, competing to buy the same companies, paying what I think everyone regards as very aggressive valuations for those companies.

ZARROLI: In other words, private equity firms are beginning to spend too much for companies, and they often pay for them in part by taking out huge amounts of debts. Just this month, the deputy governor of the Bank of England warned investors that the flood of highly leveraged buyouts could lead to a lot of defaults.

Lynn Tilton heads Patriarch Partners, which invests in what are called distressed companies. Tilton says investors right now seem to be surprisingly optimistic. They shrug off higher interest rates, rising energy prices and a persistent U.S. budget and trade gaps. And for now she says everyone's happy.

Ms. LYNN TILTON (Patriarch Partners): So long as nobody flinches, nobody loses money. The things that used to make markets go down no longer move the markets downward.

ZARROLI: But Tilton says if the economy slows down too much, a lot of these highly leveraged companies won't be able to pay off their debt.

Ms. TILTON: You have, you know, much higher multiples, you have higher leverage, and it absolutely should lead to a downturn and to some of these deals failing.

ZARROLI: Even if there is no downturn and the economy remains strong, rising interest rates could cool off the private equity market. High rates make it more expensive to do leverage buyouts. And stocks have been doing so well lately that private equity is having to compete a bit harder for investors' dollars.

But for now private equity funds are continuing to make a lot of money for their investors, and that's keeping the funds growing.

Jim Zarroli, NPR News, New York.

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