PEO 2.0:<br/>LEVERAGED BLOW-UP?

There is a story missing from the PEO top 10 for April/May. Thank goodness.

The absentee is of course the first multi-billion leveraged blow-up. So far, so good: The buyout boom is holding up.

This, according to The Economist, is good news for all of us. It noted in a recent leader that the top of this business cycle is unlikely to be marked by a media mega merger such as AOL and Time Warner's, which signalled the climax of the previous M&A boom. Concerns that Microsoft's merger with Yahoo or Murdoch's play for Dow Jones might spell doom today are misplaced, the magazine insists.

The bellwether this time will be a broken leveraged buyout of scale, which scares the bankers and ends the easy credit. This will send public equity markets plunging, buoyed as they currently are by the belief private equity that will always come to the rescue of falling stocks. Once the bankers say no, the game is up.

But for now, they are still writing big cheques, which suggests the $2 trillion mergers and acquisitions mania so far this year and counting still has some way to run, with private equity continuing to account for 20 percent of all M&A by value.

Goldman Sachs, the investment bank with arguably most to lose from the good times ending, seems to have little doubt there is still some mileage in its triple play strategy – investing in, lending to and advising on buyouts. It is putting $9 billion of the bank's and its employees' money into its brand new $20 billion fund, the largest ever raised.

Would you bet against them? PEO readers flocked to find out more about the record Goldman fund, the closing of which helped propel the bank to within a whisker of Kohlberg Kravis Roberts and The Carlyle Group in this magazine's inaugural PEI 50, the ranking by size of the 50 largest direct investment programmes we published in last month's edition.

The PEI 50 story was one of the best read on the website ever, underlining the value of the survey. Anyone can name the top ten firms, but can you put them in order and say which firms are jostling just outside the top 20?

Another highlight on PEO was the story of Apax Partners and Duke Street Capital wresting with their troubled investment in Focus. The two buyout firms are enduring some local bother, with the downturn in the UK's do-it-yourself market hurting their investment. Fuelled by booming house prices, British homeowners are increasingly paying tradesmen to do the jobs that make a home a castle.

But even if the two sponsors write off their investment in Focus in a bank-led restructuring, it is worth noting that the deal has still been a profitable one for Duke Street. And as for the bigger picture: even a dozen buyouts of this size failing will not be enough to startle the bankers.

As the PEI 50 demonstrated, the big firms now represent a massive slug of capital for deals and that means big fees for the banks. It will take a spectacular failure for them to shut down that revenue stream.