Wednesday, September 27, 2006

Deals galore!

The Financial Times ran a special report section on corporate finance today that included a very relevant article by Gillian Tett.

In, "Deals galore in a world awash in cheap money", Tett examines the relationship between easy money and an increased number of corporate buyout deals.

Private equity firms have led the latest buyout craze, thanks to increased investor participation in their funds and new ways to finance deals. As the author points out, the number of deals have increased, along with the bid prices.

One reason why private equity firms have been able to make these audaciously large bids in recent years is that investors are clamouring to put money in their funds.

However, another equally important factor is that the debt capital markets have been extremely accommodating. This partly reflects the fact that the global financial system has been awash with cash, after several years in which central bankers have kept interest rates low.

However, it also reflects a bigger structual change now afoot. For although companies used to have a very limited range of choices about how they raised finance, these days the options are getting wider, as investment banks become more adept at providing innovative issuance tools.

At the same time, the attitude of investors is changing. Whereas banks used to purchase the bulk of loans in Europe, hedge funds are now jumping eagerly into this sphere, together with specialist structured portfolio managers who run vehicles known as collateralised loan obligations (CLOs).

This has created a vast pool of investors wanting to purchase leveraged – or risky – loans, and has meant that the funding that can be placed in the market is consequently far greater in scale.

“There is a massive shift of assets under way from European banks to hedge funds and asset managers,” says Michael McLaughlin, head of global structured products at Bank of America.

I think this story really goes along with the trends described in the recent Economist article on debt. The game is changing and the creation of credit and what we call "money" becomes increasingly complex, a point I believe Doug Noland has made in the past.

We've asked before how new money and credit creation was affecting merger and buyout activity; I think we're starting to see some of the answers.