Comment: From the Editor
	This Time It's Different Dwight Cass 03/01/2007
	The belief that the leveraged buyout market is in the throes of a speculative bubble has spread beyond the journalistic head scratchers, nervous regulators and ratings agency wonks who last year began to question the economics of megadeals like HCA and SunGard. The bubble is now, more or less, conventional wisdom. But many of the worries about the LBO market—such as the Justice Department’s inquiry into whether consortia-backed (or "club") deals are anticompetitive or worries that any economic downturn or credit cycle reversal will send overleveraged leviathans into the abyss—are, while scary, somewhat beside the point. The fact that will burn investors is that there have been too many big acquisitions for LBO shops to exit them all successfully. There are two classic symptoms of a speculative bubble; the LBO market exhibits both. The first is the subversion or dismissal of traditional performance metrics. In the dot-com bubble, companies could attain billions in market capitalization without having a penny of earnings—indeed, without any revenues at all. In the world of LBOs, both the prices paid (now nearing an average of 10 times earnings) and the leverage ratios (marching north of six times earnings) are far outside the realm considered sensible only 18 months ago. The second symptom is a cognitive dissonance suppression mechanism that allows market participants to abandon tried-and-true metrics. It can be boiled down to the phrase: "This time it’s different." This bubbles up, like crudely applied plaster, through any number of cracks in the LBO facade. One particularly amusing example is the idea that private equity is no longer principally an investment strategy, but is now a form of alternative ownership embraced by companies seeking release from the twin ogres of Wall Street earnings expectations and regulatory smothering. The heads of multibillion-dollar LBO portfolio companies like to opine that they are now free to set long-term objectives, unyoked from the costs of Sarbanes-Oxley. Good for them—except that their LBO fund masters only care about returns, and those are predicated on successfully selling a restructured business after half a dozen years or so. So those CEOs mooning about the joys of the private life are going to find themselves flogged on the public markets again—and they have better beaten their behemoths into some semblance of order before they are. Who will buy them? Carlyle Group cofounder David Rubenstein predicted in a December 7 article in the Financial Times that there will be a $50 billion buyout within a year and a $100 billion buyout within two. How will LBO shops unload companies that big? The usual answer is: in bits and pieces, much like the recent floatation by Carlyle and its partners in the Hertz LBO of one-quarter of the rental car company’s equity. But those stocks will be unloved. (Who would buy a stock knowing that LBO shops are waiting to unload billions of dollars more of it?) The blob of liquidity that has allowed LBO shops to take legions of enormous companies private in the past year will not last forever—and the race for the exit will not be pretty.