Thomas Lee, one of the greybeards of the private equity business, predicted the absence of very large acquisitions for at the next year due to the deep freeze in the securtization market. The top tier of deals depended on funding via collateralized loan obligations, which Lee does not see returning any time soon.
Big leveraged buyouts won’t return for at least a year because the complex structured products and investors that supported such deals have disappeared, said Thomas H. Lee, president of private-equity firm Lee Equity Partners LLC, at a conference on Tuesday.
Still, there’s plenty of money for medium-sized buyouts, partly because loans used to pay for such acquisitions are usually kept on firms’ balance sheets and not securitized, Lee said in speech at an Institutional Investor conference in San Francisco.
The LBO boom of 2006 and the first half of 2007 was fueled by the increased use of collateralized loan obligations (CLOs), Lee said. Leveraged loans used to pay for LBOs were wrapped up in these structured products, which were then chopped into slices and sold to institutional investors such as pension funds.
Roughly $100 billion of CLOs were sold in 2006 and about $58 billion were issued in the first half of 2007, according to Standard & Poor’s Leveraged Commentary & Data. But when the credit crunch hit in the summer, issuance ground to a halt.
Banks had come to rely on CLOs, Lee said on Tuesday. In 2001, banks were putting roughly 10% of their leveraged loans into these vehicles. But by 2007, that had surged to about 70%, Lee noted.
This expanded the availability of credit beyond the balance sheets of traditional lenders like banks. But now that the natural buyers of CLOs, such as pension funds, have pulled back, such financing is gone, Lee said.
“The large-scale LBO market isn’t coming back soon. Maybe for a year or more,” Lee said. “There’s no money for the large transactions.”
“Will the natural buyer return to the CLO market? I’m not so sure,” he added.
However, the market for LBOs valued between roughly $500 million and $1 billion is still healthy. That’s because the financing for these deals doesn’t relying on CLOs, Lee said.