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August 10, 2006

"A lot of insanity" as buyouts reach new heights

Posted by Al Scott at 12:47 PM

Deputy Business Editor Rami Grunbaum filed this report from a session of today's Northwest Growth Financing Conference:

Buyouts by private equity funds are proliferating with huge deals such as the $23 billion sale of hospital operator HCA. But at a Seattle corporate-finance conference Thursday morning there was a distinct nervousness about the sector's "irrational exuberance."

"There's a lot of deal flow, but there's a lot of insanity," said John Beauclair of L.A.-based buyout fund Sun Capital Partners. "I feel like a lot of people are putting band-aids on bullet wounds."

Massive inflows of capital, increased levels of debt financing, and a slowdown in corporate earnings could combine to burst the buyout world's bubble, according to Beauclair and other representatives of small and midsize private-equity funds at the Northwest Growth Financing Conference.

Michael Nibarger, of Seattle-based Evergreen Pacific Partners, said competition among cash-flush buyout funds is driving up the price-to-earnings multiples at which private companies are being sold, while corporate earnings themselves are also high.

"You take a high number and multiply it by another high number, and you get a really high number. And that's troubling," he said. "I think there's a strong case that the multiples we're seeing now are not sustainable."

That makes it a good time to be selling a company, but a difficult time to be buying, Nibarger added. (His fund recently acquired Gene Juarez Salons & Spas).

The reason there's been such a rush of investment capital into buyout funds, said Mark Morris of Blue Point Capital Partners, is that potential 20 to 30 percent returns look appealing when the stock market is yielding 5 percent.

But all the inflow is causing a "capital overhang" as funds look to deploy their money on schedule, said Scott Svenson of The Sienna Group in Seattle. The "irrational exuberance" has big funds looking even at the smaller companies he deals with, he said, because "there is a lot of capital, and there is a clock ticking."

Needless to say, panelists were more upbeat about their own firms' prospects. For one thing, they are flying much closer to the ground than the stratospheric deals that are making the headlines.

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