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Private Equity Firms Popularity Changes Business Landscape

Blackstone Group, a private equity firm, acquired Equity Office Properties Trust for $39 billion on Wednesday, the largest-ever private equity deal. Two business experts discuss the deal and the future of private equity in the business world.

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    On Wall Street, it's all the rage: big deals, worth hundreds of billions of dollars in the past year alone, in which major publicly held companies are bought by so-called private equity firms. The latest and largest deal was announced yesterday, when the private equity giant Blackstone won a bidding war to buy Equity Office Properties, the nation's biggest office landlord. The price tag: $39 billion.

    The past year has seen other huge deals, including the buyouts of the hospital chain HCA for $32 billion, Harrah's Entertainment for $27 billion, and Clear Channel Communications, also for $27 billion.

    To help us understand what's going on, we're joined by Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business, and New York Times business reporter Andrew Ross Sorkin. He edits the paper's financial news blog, "DealBook."

    Andrew Sorkin, why don't we start off with a definition? What exactly is a private equity firm?

  • ANDREW ROSS SORKIN, New York Times:

    Well, you know, a private equity firm actually is a polite term for what we used to call LBO firms, or leveraged buyout firms, in the 1980s.

    You might recall the book "Barbarians at the Gate," which chronicled KKR, Henry Kravis from Kohlberg, Kravis and Roberts buying RJR Nabisco, in what was then the largest takeover in history.

    And so these are firms, basically, that pool capital, so they take money from pension funds, wealthy individuals. They put it in a pot, and then they leverage it, so then they take out effectively a mortgage on it. So they may take $100, and they may get a $900 mortgage from the bank, and then they go and buy a company.

    They buy that company, they turn around, hopefully, for them, in a couple of years, fix it up. They may strip the company down. Sometimes they — a lot of people lose jobs. That's one of the controversies. And then they sell the company. And that's pretty much what private equity is today.


    Professor Blaydon, tell us a little bit more about where all that money comes from. And how is so much available to these firms?

    COLIN BLAYDON, Center for Private Equity and Entrepreneurship: Well, it's the size is really a recent phenomenon of really just the last two years. The money comes, as Andrew mentioned, particularly from pension funds.

    So one of the interesting things is, is that it's particularly the public employee pension funds, our school teachers, firemen, policemen, civil servants, who are the beneficiaries of the success of these private equity funds. Also, a big hunk of the money comes from university endowments and through foundations.

    And the reason they've gotten so big is because, about two or three years ago, these funds began to have some phenomenal successes. They bought some companies right after the tech and telecom bust, when the economy was not performing very well. They bought them at good prices.

    And the debt markets, the lenders out there in the world, began to make more and more debt available to these funds to do their deals with. So they were able to do a deal. They were then able to quickly restructure, maybe put more debt on the deal, give a quick early return to their investors, and people noticed that they were having this great success.

    And the pension funds were desperately looking for places to make big investments where they could make substantial returns, because many of these pension funds are underfunded and worried about being able to meet the pension promises that have been made.

    So they stuffed a lot more money in, and they got even bigger. So we have now seen the first $15 billion private equity funds and two funds that are currently in the market for $20 billion.