Up until the credit crisis, private equity firms had it made. They had plenty of leverage to play with and could load up their acquisition targets with it. So, they could realize a fantastic return on equity, mitigate their own risks, and show that they were the studs of the Street.
Then, all that went away. Credit markets dried up, and private equity companies lost their acquisition fuel. The numbers aren't as big as they used to be, but it looks like the private equity market is back in action.
For the near term, the private equity folks are most interested in the basics -- i.e., the liquidity needed to buy and sell companies. The financial markets are opening up a bit, even allowing a few IPOs to slip through when the stars line up. Stephen Schwarzman of the Blackstone Group (NYSE: BX) says his company can handle acquisitions of $3 billion to $4 billion right now, with the Carlyle Group indicating a range of $3 billion to $5 billion.
Not only can they get in, they can get out too. The IPO market is still uncertain, as Fortress Investment Group (NYSE: FIG) saw this week with RailAmerica (NYSE: RA), which lost 8.3% in its first day of trading. But, the basic liquidity that enables private equity firms to buy company implies that they can sell, too, as there are two sides to this equation.
Perhaps the worst rough patch for the near future is one that comes from the past. Before the financial crisis, a brisk acquisition pace led many firms to overpay -- and take on boatloads of debt in the process. This hasn't gone away and could put pressure on returns even in a recovery.
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