Private Equity Is Hot Now. But for How Much Longer?

As private-equity firms spend and spend and spend — one estimate values of the last three weeks’s buyouts at $61 billion — The Financial Times’s Lex column cautions that the current mania could rank as a colossal folly.

For one, there’s far too much incoming money in search of deals. If one assumes that 80 percent of a buyout deal is leveraged, The FT hazards a guess of an astonishing $1.485 trillion in capital available for private takeouts. But the quality of that debt could be endangered, as higher risk-free interest rates, inflation and lopsided profit-to-output ratios combine to post trouble for the kind of financing such deals depend on.

Furthermore, with all that money sloshing around, private-equity firms can’t afford to be choosy anymore — and investors must still pay the high charges that come with siding with the buyout firms. Given all that, the FT warns, it’s better to be the bought-out rather than the buyer.