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New York. Buyouts are finally returning for the deal-hungry private equity industry, which is looking to deploy huge cash reserves next year into deals that buyers hope could get back up to double-digit billions.

Private equity companies are pursing public-to-private deals more aggressively as the cost of debt has fallen. Dividend recapitalizations have returned and even looser structures such as “covenant lite” are creeping back into agreements.

“We are going into 2010 with a lot of wind in the sails,” said Steven Smith, global head of leveraged finance and restructuring at UBS. “Sponsors are feeling more confident about going after assets. They are more certain of having a look at public-to-privates because they feel the financing will be there for them.”

Buyout companies are anxious to start investing after a dire couple of years. Deal flow slumped to a seven-year low this year as the crisis locked out access to financing; existing investments suffered and fund-raising slowed to a snail’s pace.

Now, private equity houses are assessing more targets, encouraged by a return of financing and an improving economic outlook. Sellers are more willing to do deals as multiples have improved and competition among buyers boosts prices.

Still, bankers caution that leveraged buyout deals remain hard to clinch, because typical sellers’ expectations are still higher than the price buyers are willing to pay. While deals are a fraction of their size during the boom, the value has been creeping back.

TPG Capital struck the year’s biggest leveraged buyout, buying IMS Health for $4 billion. Sweden’s EQT last week secured the 2.3 billion euro ($3.6 billion) secondary buyout of Springer Science, while Blackstone bought Anheuser-Busch InBev’s US theme parks for up to $2.7 billion.

The industry is again viewing deals of up to $10 billion or higher as not impossible, but such transactions could only be achieved if companies clubbed up.

“Sponsor activity is back again,” said Peter Toal, head of the leveraged loan syndicate for the Americas at Barclays Capital. “Perhaps not to the level of activity it had been and I don’t think we will see the volumes quite as large — $50 billion LBOs are still a long way off — but there is a dramatic improvement in activity nevertheless.”

But new deals means capital calls for investors and not all welcome the prospect, which is increasing the pressure on some companies to make distributions.

A number of firms have taken portfolio companies public, partly to pay down debt and partly to distribute cash. There has also been an increase in dividend recapitalizations. Bankers are expecting that trend to continue.

Some pension funds and endowments are awaiting distributions before they will invest in new funds, prompting buyout firms such as BC Partners to prepare a raft of portfolio companies for IPOs ahead of an anticipated fund-raising in 2010.

Some of the biggest names are expected to launch new funds soon. Blackstone is raising its latest buyout fund, BCP VI, and has so far attracted about $8 billion to $9 billion, while KKR is also expected to launch a new fund.

Anticipating a fall in contributions from existing investors, big private equity firms have been warming up powerful sovereign wealth funds, who they hope have deep enough pockets to take up any slack.

In sovereign wealth, once touted as a competitor to private equity for deals, firms see a willing joint investor whose firepower will help them pursue those larger acquisitions.



Reuters