Private Equity Diet May Cut Investor M&A Hopes: Street Whispers

NEW YORK ( TheStreet) - The smart money doesn't think there are too many stock bargains out there, giving a signal to retail investors that buyout kings will not be offering to snap up large-cap names at big premiums anytime soon.

In spite of record low interest rates and recovering corporate profits, top executives at private equity firms told a conference filled with bankers, pension funds and endowments last week they were cautious on the pricing of publicly traded companies and on global economic growth expectations.

"The public markets are not exactly cheap given multiples on EBITDA earnings before interest, taxes, depreciation and amortization" said Richard Friedman, the head of private equity unit at Goldman Sachs ( GS), the Dow Jones Private Equity Analyst conference on Thursday.

As a result, Friedman said Goldman Sachs -- once one of the biggest buyout investors of large publically held companies - is now focused on buying small-to-mid-cap targets and companies not publically traded but held on the books of other private equity funds.

The changing nature of Goldman's private equity investments reinforces Friedman's assertions. The bank's recent $1.1 billion buyout of Interline Brands is far smaller than the $20-billion plus sized buyouts of Kinder Morgan ( KMI), TXU, Nextel and Biomet, which Goldman participated in prior to the bust.

That may be bad news for investors in cash-generating, but shrinking large-cap buyout targets like Best Buy ( BBY) since they may not catch a bid from private equity buyers as firms withdraw from mega-sized deals.

Joshua Harris, a senior managing director at Apollo Global Management ( APO), also signaled investors should not expect private equity firms to ride to their rescue with big premium offers. "I think the days of $20, $30, $40 billion deals is behind us." Instead Harris sees players like Apollo targeting smaller deals where buyout financing from banks tops out at around $3 billion.

In fact, few investors polled at the conference expected a private equity buyout in the remainder of 2012 to top Apollo's $7.15 billion acquisition of El Paso's oil and gas exploration unit, which currently stands as the largest deal of the year.

Despite the reluctance for big deals, William Conway, one of the co-founders of the Carlyle Group said on Thursday, "you still have to pick your spots, but now is a good time to invest." Conway highlighted the U.S. as the most attractive region for investment, while also noting that contrarian investments in Europe exist and as do opportunities in slowing Asian economies.

In fact, Conway made the case that the pension fund and endowment investors at the conference have to remain invested, regardless of whether economic concerns, uncertainty over the direction of interest rates and a hotly contested presidential election muddle the near-term outlook.

"You have a choice what to invest in, you don't have a choice of whether to invest," he said. Carlyle is focusing on companies in the power generation, industrials and chemicals industry, in addition to investments in esoteric debt products.

Conway's optimism comes in contrast to his outlook when stock indexes were last near current levels ahead of the financial crisis. In Jan. 2007, Conway wrote in a letter to investors that the near-unlimited availability of buyout financing was creating a bubble environment that would burst, eventually creating a buying opportunity. As Bloomberg recently noted, Carlyle has been the busiest buyout firm of 2012, signaling opportunities exist.

For more on private equity deals, see why Goldman Sachs is cutting its private equity future by half. Also see why a dividend is key to Carlyle Group's stock strength.

-- Written by Antoine Gara in New York

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