LBOs are only going to get bigger -- here's why
Rival firms are teaming up in 'club deals' to take large public companies private -- sending dealmaking activity through the roof.
By David Stires, FORTUNE Magazine Writer

NEW YORK (FORTUNE) - The grand ballroom at the Pierre Hotel in New York is an unlikely place to hear people talk about going "clubbin'," particularly when they're a bunch of Wall Street types wearing expensive suits.

But that was the hot topic of conversation at the 18th annual private-equity conference sponsored by the trade magazine Buyouts in early March -- a gathering that some describe as "the Davos of private equity."

In this context, "clubbin'" referred to a particular kind of leveraged buyout, in which rival firms team up to take large public companies private. The transactions typically involve obscene sums of money and grab big headlines, such as last year's $15-billion leveraged buyout of Hertz rental cars by Clayton Dubilier & Rice, the Carlyle Group, and Merrill Lynch Global Private Equity.

And although "clubbin'" is a relatively new phenomenon, the consensus at the conference was that this party is just getting started.

"It's definitely here to stay," said panelist Alan Holt, Carlyle's co-head of U.S. buyouts.

Club deals are on the rise

The rise of club deals comes at a time when business at private-equity firms has never been better. Last year, buyout shops broke all previous records, spending about $200 billion in 845 deals. The amount spent was nearly 50 percent more than 2004's total, more than twice the amount in 2003, and upwards of eight times the amount spent by buyout shops in 2001, the industry's most recent low point.

Private-equity firms have been snapping up many of America's most iconic names: Neiman Marcus, Toys "R" Us, Dunkin' Donuts, and Warner Music, to name a few. And the spending spree looks certain to continue. Investors plowed $86 billion into private-equity funds last year, up 65 percent from 2004. That money needs to be put to work.

Unlike Davos, Bono was nowhere to be found during this two-day conference. The closest thing to celebrity was former NFL quarterback Phil Simms. Over lunch of filet mignon and roasted vegetables, Simms told attendees war stories about what it was like playing for his coach, Bill Parcells.

In fact, much of the conference felt more like a trade show. Some sessions were technical how-to guides -- "Sarbanes Oxley Revisited" and "The Legal and Political Climate for Asian Private Equity." Eager to cash in on the great buyout boom, investment bankers and lawyers pitched their services with fancy brochures outside the ballroom.

Among panelists, however, the focus was clearly club deals. The rationale for these transactions is simple: The private-equity firms can share risks, draw on each other's expertise, and increase the size of the takeover they can mount.

That last point is particularly important, as increased competition is forcing buyout pros to hunt bigger game.

Said Neil Simpkins, a senior managing director at the Blackstone Group, "With all the new players, you'll see even bigger deals." Top of page