Private equity: The beat goes on

Two of the world's most powerful buyout firms make stunning announcements - even with obstacles lurking for the industry.

By Grace Wong, staff writer

LONDON ( -- While Wall Street cleared out for the July 4 holiday, two of the leading names in private equity made blockbuster announcements - flexing their might at a time when buyout deals are coming under increasing pressure.

On Tuesday night, Kohlberg Kravis Roberts filed for a $1.25 billion initial public offering. That news was quickly followed by archrival Blackstone Group's announcement that it was buying Hilton Hotels (Charts, Fortune 500), one of the most recognized brands in the industry, in a deal valued at a whopping $26 billion.

While the rising cost of debt has raised concerns that the best days of the buyout boom are past, the recent announcements send a clear message: private equity firms - at least the most powerful ones - are here to stay.

"Private equity deals will continue. Private equity has taken big amounts of capital to do deals. Based on the funds they've raised, their silos are fairly full. I don't see it going away quickly," said Bernard McAlinden, investment strategist at NCB Stockbrokers.

The frenetic pace of leveraged buyouts has made private equity firms a dominant force on Wall Street the past few years. In the first six months of the year, private equity buyouts accounted for 34 percent of the $1 trillion in U.S. deal activity, according to deal tracker Dealogic.

Blackstone (Charts) and KKR have been behind some of the biggest deals in buyout history. Blackstone's buyout of Hilton is the second high-profile name it has nabbed in real estate, following its $39 billion buyout of Equity Office Properties Trust. KKR, meanwhile, is still synonymous with its $31 billion takeover of RJR Nabisco in 1988 and recently, along with other investors, landed utility TXU (Charts, Fortune 500) for $44 billion.

"The bottom line is private equity is still on course for a record year," said Torben Nielsen, market strategist at Saxo Bank.

But the market is cyclical, he said, adding that Blackstone's latest deal and KKR's decision to go public both coincide with possibly the end of low interest rates.

The Bank of England is widely expected to raise interest rates when it meets Thursday and the European Central Bank, which sets rates for most of Europe, has also been pushing rates higher. The Federal Reserve kept rates on hold at its last meeting, but some economists think it will hike rates at the end of this year or early in 2008.

The dizzying pace of take-private deals has helped drive the stock market by lifting sentiment and reducing the supply of shares available to the public. But some worry that benefit may begin to wane as cheap credit becomes less available.

In addition to tougher market conditions, private equity has come under a harsh spotlight. In the U.S. and U.K., rancor has been triggered by what some believe to be the unfair tax advantages buyout firms enjoy. Lawmakers on both sides of the Atlantic are closely investigating the tax treatment of private equity.

For now, private equity firms appear to be shaking off those concerns. KKR filed to list as a partnership, which would make it susceptible to higher taxes if a bill recently introduced in the Senate becomes law.

KKR is following in the footsteps of Blackstone, which made a splashy debut with its $4.1 billion initial public offering just last month. The announcement from the buyout veteran also comes on the heels of hedge fund firm Och-Ziff Capital Management's IPO filing made earlier this week.

The recent spate of hedge fund and private equity IPOs worries some market participants, who say the march toward public markets may be a sign that insiders believe the market for alternative investments has hit a peak.

"[Private equity firms] need to put money to work, but I think when that's done, you're probably looking at the peak of private equity in these months or at the end of the year," said Nielsen.

Others say going public is part of the industry's evolution. If it's public, KKR will be able to better compete with Blackstone when it comes to deals and attracting top talent. Many expect other big names such as Carlyle Group, Apollo Management and TPG (formerly Texas Pacific Group) to also go public. Top of page

10 biggest leveraged buyouts
Target Acquirer Value ($billions) Value ($billions, ex-debt) Announced Status
Bell Canada Enterprises (BCE Inc) Teachers Private Capital, Providence Equity Partners, Madison Dearborn Partners 48.48 32.63 30-Jun-07 Pending
TXU Corp Kohlberg Kravis Roberts & Co., Texas Pacific Group, Goldman Sachs Capital Partners 43.80 31.80 26-Feb-07 Pending
Equity Office Properties Trust Blackstone Real Estate Partners 38.89 22.89 20-Nov-06 Completed
HCA Inc. Bain Capital Inc., Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity 32.68 20.98 24-Jul-06 Completed
RJR Nabisco Inc. Kohlberg Kravis Roberts & Co. 31.10 25.07 25-Oct-88 Completed
Alltel Corp. TPG Capital (Texas Pacific Group), Goldman Sachs Capital Partners 27.87 25.71 21-May-07 Pending
First Data Corp. Kohlberg Kravis Roberts & Co. 27.73 26.35 02-Apr-07 Pending
Harrah's Entertainment Inc. Apollo Management, Texas Pacific Group 27.40 16.83 02-Oct-06 Pending
Clear Channel Communications Inc Bain Capital Inc, Thomas H. Lee Partners 26.44 19.36 16-Nov-06 Pending
Hilton Hotels Corp. Blackstone Group 26.01 18.51 03-Jul-07 Pending
Source: Dealogic