It was only a matter of time before the record for the world's biggest private-equity deal was broken. And it is fitting it was KKR that broke it. Seventeen years after the buyout group stunned the markets with its legendary $31bn bid for cigarette-maker RJR Nabisco, KKR has topped it with an agreed $32bn bid for US private hospital group HCA. But whereas the RJR deal proved the high-water mark for the industry for nearly two decades, the latest record won't last long. Private-equity groups are no longer the "Barbarians at The Gate", but mainstream players in the financial world and investors would do well to get a slice of the action.
One reason why private equity has won mainstream acceptance is that it is a more sober industry than it was in 1989. The RJR deal was a far more risky bet than KKR's HCA gamble. The HCA deal may be bigger in nominal terms, but allowing for inflation, the RJR deal was nearly 50% bigger, worth about $49bn in today's money. The RJR deal was financed with only 16% equity, compared to 26% this time round. And while KKR was happy to bet the farm on RJR, using 63% of its 1987 fund, the HCA deal will use only about 10% of the $15.5bn fund KKR is currently raising.
That should at least ensure the HCA deal avoids the fate of RJR, which delivered returns of just 1% a year over the life of KKR's investment. Given the rising number of older people and growing cost of healthcare, HCA looks a pretty solid bet. It should have little difficulty meeting its 20%-plus per year return targets.
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And where KKR has led, others are sure to follow, lured by the prospect of similarly juicy returns. The only question is whether the debt markets remain open for private equity to borrow the money they need to fund deals. But currently, there's no problem quite the reverse. Money is as plentiful as ever. If the equity markets tumbled, private equity would simply regard it as a chance to buy cheap.
So how can investors get a slice of the action? Until now, it's not been easy. But that's changing. The latest buzz phrase in the City is "permanent capital". Private equity groups are looking to raise listed funds on the stockmarket, which are akin to traditional investment trusts except the cash is invested in private-equity deals alongside traditional funds. One of the earliest examples of this type of fund was SVG, which invests alongside Permira. More recently, KKR raised $5bn in a similar fund listed on the Amsterdam stock exchange. Investment bankers say they have a raft of similar deals both for private equity and hedge funds - waiting to bring to market.
For private investors, these funds are potentially very exciting. Sure, the fees are high, as they are on all private equity and hedge funds. But they give ordinary investors access to new products and strategies that were previously the exclusive preserve of the super-rich. That's because you can sell your shares whenever you want and you can trade in small sizes. It is the clearest evidence yet that hedge funds and private equity have become literally a permanent feature of the financial landscape. Two decades on, the barbarians have been offered the keys to the citadel.
Why politicians should accept globalisation
We have entered an era of "rampant cross-dressing", Tony Blair said in a speech this week. His point is that the big divide in politics these days isn't between left and right, but between advocates of modern, open societies and closed, political ones. He's right. Globalisation is the defining issue of our age. And what matters is how politicians respond to it. At heart, large parts of both the Labour and Conservative parties are nervous of further globalisation. And because fear is often a more powerful political force than hope, these sections often hold sway.
Labour want to preserve and enhance the welfare state, which becomes much harder in a globalised world where firms and people can vote with their feet. Meanwhile, Tories believe the key to social cohesion is national sovereignty and the preservation of traditional institutions. But these too are threatened by globalisation.
The problem for politicians is that whatever people's emotional response to the challenges of globalisation, as business people and parents, they realise there is nothing to be gained from turning back the clock. That's why they inevitably vote for the party that goes with the grain of globalisation. It's why they voted Tory in the 1980s and early 1990s, rejected the Tories and voted for Blair at three elections on the trot, and are now edging towards Cameron over Brown. It's also why successful leaders often end up having to fight their own party.
Perhaps one day there will be a realignment of politics around two parties similar to that in the high Victorian age of globalisation: one party pro-globalisation and one that prefers some form of autarky. Personally, I can't see the latter party getting very far. In the meantime, this conflict will continue to hamstring political parties, leading to weak and ineffective governments. That's bad news for the British economy.
Simon Nixon is executive editor of Breakingviews.com
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