The Big Deals Wheel Again

Toys "R" Us. Dunkin' Donuts. Univision. Hertz. Those are names of well-known American companies. Bain. Carlyle. Texas Pacific. KKR. Those are names of the lesser-known outfits that bought them in the past year and a half. If you thought the New York Stock Exchange was the place to invest, think again.

Private-equity firms pumped up with vast amounts of money are snatching public companies in an unprecedented buyout wave. In an updated, renamed version of the leveraged buyout, or LBO, private-equity firms acquire undervalued companies, load them with debt, overhaul operations and then return them to the stock exchanges whence they came in ballyhooed IPOs--collecting fees at every turn. Fever pitch officially took hold last week when hospital chain HCA was taken private by its management, founder and three buyout firms in a record deal worth more than $30 billion.

The amount of money flowing into such deals is off the charts--nearly $198 billion so far this year, including debt, compared with $118 billion for 2005 and $96 billion for 2004, according to Thomson Financial. Flush with cash from investors seeking better-than-market returns, buyout firms are looking for places to spend the $70 billion raised so far this year, not to mention the $130 billion from last year. And they can borrow as much as $10 for every $1 they invest, meaning there aren't many companies out of reach. Says Mark Nunnelly, managing director of Bain Capital, one of the firms in the HCA deal: "Private equity is here to stay as an important player."

The last time we were in a place even roughly comparable was the late 1980s, the decade that birthed LBOs, so called because firms got a lot of their buying power from debt, or leverage--particularly high-yield, risky junk bonds. Raiders feasted on bloated conglomerates such as Beatrice, buying them up, busting them apart and reselling at a profit--until the economy slipped into recession. The ensuing bankruptcies killed off the junk-bond market, and the deals dried up. The late 1990s saw a tech-driven LBO resurgence, but that too ended with the 2000 bubble burst.

Now the buyout firms are back, and there are more of them. The new boom is being fed by low interest rates, a no-go stock market and banks eager to lend. CEOs are more willing to listen since stepped-up regulation and a focus on short-term performance has taken some of the allure out of running a publicly traded company.

But most important, demand from investors has skyrocketed, especially from pension funds, which means you might be invested in a buyout fund and not even know it. The long-term outlooks and multibillion-dollar purses of institutional investors have always made them a match for buyout funds, which lock up money for five to 10 years, promising a high return in exchange. These days, there's even more interest because "alternative investments," which also include hedge funds, are all the rage. Pension funds that used to invest, say, 2% of assets in those vehicles now go up to 10%, and smaller funds that used to steer clear of buyouts are jumping in.