What's next for PE?

By Nicholas Varchaver, Fortune senior writer

So what's in store for PE? Fortune canvassed the experts to find out what they're expecting in 2007.

What sectors will be hot?

Where PE once focused more on smokestack industries, now any company with high cash flows and low valuations will be in play. Sectors mentioned by multiple dealmakers include health care, pharma, financial services and homebuilding. Giants such as Dell, Gap, Home Depot and Unilever are now routinely bandied about as potential targets.

What about international?

Expect more activity in Asia. Firms such as Texas Pacific and Carlyle already have a strong presence there, but others, such as KKR and Bain, are reportedly raising Asia-specific funds. And the development of markets in China, India and even Vietnam means funds now have a way to make a profitable exit from deals in those countries. With so much cash in search of so few bargains, buyout funds may take roads less traveled into Eastern Europe and Latin America.

How will the PE landscape change?

Traditional yardsticks such as price-to-Ebitda are up 20 percent in the past three years, according to Standard & Poor's LCD, and price inflation is acute in middle-market transactions, says Bob Filek, a partner in the PricewaterhouseCoopers transaction-services group. But he argues that because very few funds can compete for the mega-acquisitions, firms like KKR and Texas Pacific can actually obtain better prices in the giant deals. That suggests there will be pressure on midsized PE firms.

What's the endgame?

As PE funds look to sell companies they have taken private and spruced up, a big crop of IPOs will eventually ensue. In the end, says Goldman Sachs co-head of private equity Charles Baillie, "we're headed for a downturn - the question is when." But the giant private-equity funds are so larded with cash that even when one or two gets singed, and the inevitable credit pullback occurs, they'll still have the means to make deals. This is one bubble that may end with a whimper, not a bang.

Reporter associates Katie Benner, Telis Demos, Corey Hajim and Jia Lynn Yang contributed to this article.

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