Buyout Fever Infects Financials

No sector of the economy is immune to the allure of private equity anymore.

Private equity shops have racked up more than $370 billion in global buyouts this year. The private equity gang is on pace to easily eclipse last year's record in terms of deal volume, at $730 billion.

The biggest headline getters have been megadeals such as the $43 billion offer by Kohlberg Kravis Roberts and Texas Pacific Group for Texas utility giant TXU (TXU Quote). This week, Warburg Pincus agreed to fork over $3.7 billion for struggling contact lens maker Bausch & Lomb (BOL Quote). Buyouts big and small have come in practically every business.

But what's most striking is that buyout shops have moved strongly into two sectors they previously only dabbled in: consumer products and financial services.

According to data firm Dealogic, the finance industry accounts for the most active area, with $62.5 billion in buyout transactions year to date. That compares with $26.6 billion in deals completed for all of last year and $13.9 billion in 2005.

Take KKR's planned $27.9 billion purchase of credit card processing firm First Data (FDC Quote) and a four-way, $25.6 billion bid for student lending company Sallie Mae(SLM Quote). The deals show how the buyout artists are embracing deals that once seemed beyond their reach.

The financial sector is not necessarily an area in which private equity shops have traditionally gravitated. After all, buyout shops are looking for home runs when they do big go-private deals, and they typically achieve big returns in part through heavy borrowing.

But financial institutions need to keep their debt loads under control to maintain their high-quality bond ratings and low lending costs, so they have often been seen as beyond the scope of buyout shops.