But RJR Nabisco is remembered both for its size and its disappointing performance. The company languished for several years despite KKR’s attempts to energize it. After spinning off its tobacco business, KKR disposed of the remaining bits in 2005. Whether the large LBOs being arranged today will perform any better is an open question, especially since they have an additional element of risk: The largest transactions today are typically backed by consortia of private equity firms.

TOP VIEW: Many of the leveraged buyouts of extremely large companies such as SunGard, Hertz and GMAC in the United States and Europe have been sponsored by consortia of private equity firms. These transactions carry the novel risk that a consortium’s members–who otherwise face off in heated competitions for the best assets–may have a falling out over strategic or administrative aspects of a deal. But specialists say the real problem with these transactions is the difficulty their sponsors face getting large, often mature companies to grow at the rapid clip their investors expect.

In 2005, a group of eight leading private equity houses, including Silver Lake Partners and The Blackstone Group, purchased SunGard Data Systems, a financial technology company, for $11.3 billion. The deal was topped shortly thereafter by a consortium consisting of The Carlyle Group, Clayton, Dubilier & Rice and Merrill Lynch Global Private Equity, which bought Hertz for $15 billion. A host of similar, though often smaller, deals has closed in the past two years.

The investment guidelines of most private equity funds prohibit them from putting more than a predetermined percentage of their assets in any one transaction, primarily to avoid exposing investors to the risk of overconcentration. For transactions measured in the billions of dollars, even the largest funds may be forced to ally themselves with rivals in order to aggregate enough equity capital.

These Brobdingnagian private equity deals are leading private investors and family offices into uncharted territory. Those that have channeled money into the popular private equity funds of funds may already have exposure to megadeals, or will as the transactions proliferate. Investors need to weigh how their risk-and-reward landscape differs from more traditional, smaller private equity fund exposures (and from direct exposure to particular buyouts). They must determine the return potential of these leviathans–essentially, whether such large and established companies can be substantially improved within private equity investment timeframes.

"Just as there will be failures of smaller transactions that no one will ever hear about, there are going to be some failures of these mega transactions, but they will be highly publicized," says Tony Rickert, Washington-based chair of the U.S. private equity practice group at DLA Piper Rudnick Gray Cary. He adds that the failures of large and small deals will arise for the same reasons: "Overpaying for a company; not anticipating its problems; borrowing too much money; and not having enough cushion between the amount of debt you borrow and what you pay for the company to be able to work your way out of a problem."

Small Triumphs
The risk of actual loss, versus the risk of underperformance, may differ from smaller transactions, Rickert says. "I think the risk of losing your principal is either the same or slightly less with these mega transactions, but I think the jury is still out on the risk that you will not make as much upside as you had hoped. I believe it is more difficult with the mega companies to create additional growth, which is the basis for profitability and increasing the value of your investment."

This, Rickert argues, is because larger companies generally have more stable cash flows than their smaller counterparts. Their big balance sheets, along with their generally more diversified operations, mean they can weather economic imbalances more easily than the smaller businesses. "The large-cap companies can withstand the bumps in the road. Losing a major customer, for instance, could have a large impact on a smaller company, but a larger company can withstand the volatility," says James McGovern, managing director at private equity investment advisory firm Franklin Park, based in Philadelphia.