Private equity deals at five-year low

By Megan Davies

NEW YORK (Reuters) - Private equity deal volume sank to a five-year low in 2008, one of the industry's roughest years ever, and 2009 is unlikely to get any easier as firms struggle to find deals, keep portfolio companies above water, and pacify increasingly restless investors.

Global private equity activity sank to $188.7 billion (126 billion pounds) this year, down 72 percent from 2007, Thomson Reuters data show, as the global financial crisis crippled banks' ability to lend for deals.

Buyout deals were just 7 percent of total M&A volume -- the lowest level since 2001 and a far cry from the boom years of 2005-2007 when giants such as Kohlberg Kravis Roberts & Co, Carlyle Group and Blackstone Group (BX.N) were striking multibillion-dollar deals on a regular basis.

Buyout deals reached an all-time high of 20.5 percent of M&A volume in 2006.

As the economic malaise spreads, some of the deals agreed during the heady credit-fuelled period look like increasingly bad ideas as companies are now saddled with high debt repayments at the worst time.

Indeed, the last 12 months have been punctuated by buyout firms trying to extract themselves from ill-conceived deals.

The biggest issue for the year ahead is retaining support from buyout firms' limited partners -- the powerful pension and endowment funds that are their main investors. Return on funds spent during the boom could be hammered by portfolio company failures and deal blow-ups.

"The question is, how many limited partners will continue providing money?" said Steven Kaplan, a professor of finance specializing in private equity at the University of Chicago. "Historically, in markets like this they cut back, and it's precisely the time they shouldn't."