Private Equity: The Challenges Ahead

Pioneer Tom Hicks says competition and higher interest rates may drive down returns—and smaller deals may end up being the most lucrative

BusinessWeek.com, December 12, 2006, 12:00AM EST

The last year has been notable for a string of massive leveraged buyouts that have extended the limits of what private equity firms can do. Kohlberg Kravis Roberts bought hospital company HCA for $33 billion, beating the record that KKR established in 1988 with the RJR Nabisco deal (see BusinessWeek.com, 11/10/06, "The Dark Side of the M&A Boom"). The record was broken again in November with The Blackstone Group's $36 billion acquisition of Sam Zell's Equity Office Properties Trust (see BusinessWeek.com, 12/08/06, "Private Equity: What's the Limit?").
But in a year of record deal volume (see BusinessWeek.com, 11/07/06, "The Money Behind the Private Equity Boom"), the vast majority of transactions are much smaller. Buyout pioneer Thomas Hicks specializes in those smaller deals, which he says can be at least as profitable as bigger LBOs that dominate the headlines. On Dec. 8, his Hicks Holdings teamed up with The Watermill Group, a private equity firm in Lexington, Mass., to acquire Latrobe Specialty Steel of Latrobe, Pa., for $215 million in cash and $35 million in assumed debt. The company sells steel to civilian and military aircraft makers.