“Bigger is Better”

Scott Schoen of Thomas H. Lee Partners gave an interesting keynote speech at the Yale SOM Private Equity Conference last Friday. His general theme was that bigger buyouts are better buyouts, in part because larger deals finance better than do smaller ones. Some quick notes:

* Schoen acknowledged that the biggest threat to mega-LBOs would be tightening in the lending markets, but also argued that there could be a beneficial flip-side. Specifically, less-available debt – or at least less available at sponsor-friendly terms – could result in lower purchase prices. Firms like TH Lee that have billions dollars in dry powder could once again begin buying low and selling high, as opposed to the current model of buying high and selling higher. Yeah, it’s an optimistic win-win scenario, but that’s the nature of today’s LBO beast…

* TH Lee has invested in deals totaling $125 billion since Schoen joined 20 years ago. An astonishing $60 billion of that comes in just the past 12 months.

* Schoen emphasized that LBO demand (deal-flow) continues to outpace LBO supply (funds). That said, he also pointed out how co-investment is playing a large role in the ever-growing deal sizes. In the case of Univision, for example, TH Lee sold down around $200 million to limited partners. They had asked for $2 billion.

* Private equity-backed deals comprised 4% of all corporate M&A in 1998. This year it’s up to 21 percent. Schoen listed several factors in driving the growth, including activist hedge funds, CEO frustration with having to meet quarterly Wall Street projections and the fact that private equity has a lower cost of capital (and can act faster) than do strategic buyers.