Current Trends - Over-supply of Capital to the Large Buyout Segment

History has demonstrated that there has always been some sector within the private equity market that has had too much capital relative to deal flow. Today, the large-cap buyout sector of the asset class may be this sector. This excess of capital is best demonstrated by the significant sector increase in the capital raised to finance large-cap corporate buyouts. This global capital pool has grown from $63 billion in 2001 to $147 billion in 2005, (see chart) representing an increase of $84 billion (or a 130% increase) over the past five years. The money raised for buyouts in 2005 is greater than the $135 billion of new capital invested in the U.S. stock market last year. Given that 80% of the aggregate commitments raised over the past five years have been flowing to the large end of the buyout market, we believe that this will put downward pressure on returns in this sector. Offsetting this increase in capital is the number of deals that were done during the same time period. These have also grown dramatically, from 248 to 858 over the same five year period. The 858 transactions in 2005 represents a 62% increase over the 531 deals in 2004 as reported by Deal Logic. In the U.S., this growth has been fostered by large corporate restructurings, industry consolidations and a desire on the part of companies to be free from the regulatory bureaucracy imposed upon public companies. The privatization trend is increasingly more significant as demonstrated by 75 companies that chose to de-list in 2005, up from 60 in 2004.

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